By Nick Timiraos
Federal Reserve Chairman Jerome Powell's whatever-it-takes
moment arrived Monday.
The central bank signaled it would do practically anything --
extending loans to big and small businesses and purchasing
unlimited amounts of government debt -- to help an American economy
in a race against time.
After firing its arsenal at funding markets last week to prevent
a public health crisis from morphing into a financial crisis, the
Fed said it would throw another kitchen sink this week at credit
markets that have broken down. The central bank unveiled a new
generation of lending facilities to prevent a liquidity crunch from
turning into a solvency crisis for American businesses.
"This is the first time they've really basically turned into a
commercial bank instead of a central bank," said Michael Feroli,
chief U.S. economist at JPMorgan.
The central bank's announcement came as lawmakers on Capitol
Hill debated a plan to help reload the Fed's weaponry. The Trump
administration and Senate Republicans proposed Sunday providing
$425 billion to the U.S. Treasury that could be used to expand the
kind of lending programs the Fed unveiled Monday. The bill hit a
procedural roadblock after Democrats said it needed to do more to
aid individuals facing unemployment or lack of income.
Monday's announcement was "really encouraging because the Fed
didn't wait for Congress to pass this bill," said Tiffany Wilding,
economist at Pacific Investment Management Co. "I don't think the
markets could have waited."
The central bank punctuated its moves, announced 90 minutes
before markets in the U.S. opened Monday, with an unusually
explicit warning about the perils ahead.
"It has become clear that our economy will face severe
disruptions," the Fed said in its statement Monday morning.
"Aggressive efforts must be taken across the public and private
sectors to limit the losses to jobs and incomes and to promote a
swift recovery once the disruptions abate."
Stock futures briefly rallied after the Fed announced its latest
steps, but stocks traded lower after markets opened. The benchmark
10-year Treasury yield fell from 0.805% just before the
announcement to less than 0.69% afterward. Yields closed at
0.763%.
"Even after today's announcement, we've seen a lot of selling,
and there will be a lot of selling to come, and the Fed, as a
buyer, has given investors that opportunity," said Ellen Zentner,
chief U.S. economist at Morgan Stanley.
The latest actions show how Mr. Powell has rapidly adopted the
crisis-fighting posture that his predecessor, Ben Bernanke,
employed in the fall of 2008, during the financial crisis, and that
then-European Central Bank President Mario Draghi deployed in 2012,
as strains in Europe's sovereign-debt markets threatened the
continent's common currency.
"The Fed has done almost everything in its power," said Scott
Minerd, chief investment officer at money manager Guggenheim
Partners LLC. "They are rolling this stuff out as fast as they
can."
President Trump, who has frequently attacked Mr. Powell and
bemoaned the strength of the dollar, said he called the Fed
chairman on Monday to compliment him. "I said, 'Jerome, you've done
a really good job.' I was proud of him. That took courage," he
said.
The Fed already has moved further and faster than it did in late
2008, when the failure of Lehman Brothers sparked a financial panic
that aggravated an economy slowing under the weight of a bursting
housing bubble. The actions announced Monday to lend to large and
small American businesses take the central bank well past the
playbook it used in 2008, when it was focused primarily on
preventing financial institutions from failing.
The current situation is different and in some respects more
dire than in 2008 because of the hard stop to economic activity
across the country.
The Fed's latest lending facilities essentially bypass the
banking sector and Wall Street dealers, which the Fed has flooded
with cheap loans -- so far to little effect. "The dealers and banks
are supposed to intermediate markets, and they're just not able to
do it," said Ms. Wilding of Pimco.
The big question now is how quickly the Fed, working with the
Treasury Department and awaiting a potential infusion of funds from
Congress, can limit a deepening working-capital crunch moving
across the economy.
Once the facilities are launched, officials are likely to face
tricky questions about how much farther to intervene in credit
markets that remain in rotten shape, especially those for
longer-dated municipal debt and riskier corporate credit.
While the Fed can't directly purchase private-sector assets or
longer-dated municipal debt, it has sweeping authorities that it
has now invoked six times in the past week to lend on a broad basis
during emergencies. These so-called 13(3) authorities are named for
the section of its charter that authorizes this activity.
Still, there are limits to how far the Fed can go. The loans
must be well secured, and the Fed often seeks a backstop from the
U.S. Treasury when its lending could lead to significant credit
losses, which it received for three lending facilities announced
Monday and two others unveiled last week.
Economists now expect the economy to experience a severe
downturn. Morgan Stanley expects the economy to contract at a 30%
annualized rate in the April-to-June quarter, after a 2.4%
contraction in the current quarter, which it said would send the
unemployment rate to 12.8% this spring -- the highest on records
that date to 1948.
Among the actions announced Monday, the Fed said that the
purchases of Treasury and mortgage securities that it approved one
week ago are essentially unlimited and that it would buy $375
billion in Treasury securities and $250 billion in mortgage
securities this week.
By point of comparison, the Fed will buy more government-backed
debt this week than it did during a controversial round of asset
purchases, called quantitative easing or QE, that it undertook
between November 2010 and June 2011, when it bought $600 billion in
securities.
One week ago, the Fed cut its benchmark rate to near zero and
said it would purchase at least $700 billion in Treasury and
mortgage securities. It quickly bought hundreds of billions of
dollars of securities, prompting Monday's announcement to
underscore the open-ended nature of potential purchases.
The action will swell the Fed's balance sheet this week beyond
the $4.5 trillion peak reached in 2014, when it ended its final QE
program. To support the market for multifamily housing, the central
bank said would begin purchasing commercial mortgage-backed
securities issued by government-supported entities.
The Fed announced three new lending facilities to unclog credit
markets with $30 billion in support from the Treasury, which
officials said would enable $300 billion in financing.
The first of these includes the crisis-era Term Asset-Backed
Securities Loan Facility, or TALF, which the central bank in 2008
used to support consumer and business credit markets. The Fed will
lend money to investors to buy securities backed by credit-card
loans and other consumer debt.
Two new facilities will support lending for large companies, an
unprecedented step for the Fed. One will address the lack of new
financing in the roughly $6 trillion market for highly rated
corporate debt by offering bridge loans for up to four years. That
program includes limits on the payment of dividends and stock
buybacks for firms that defer interest payments on their loans.
A second facility is aimed at unblocking the market for existing
corporate debt, allowing the Fed to purchase bonds already issued
by highly rated companies and eligible exchange-traded funds, which
have around $147 billion in investment-grade corporate debt.
"It's a step in the right direction, but so far the facilities
are relatively small," said Jan Hatzius, chief economist at Goldman
Sachs. "More would be better."
The Fed said it would soon roll out a Main Street Business
Lending Program that will support lending to eligible small and
midsize businesses. Such a program is likely to depend on
additional money from the Treasury Department, and the Fed didn't
provide details about it Monday.
In a statement Monday, Mr. Mnuchin said he expected to increase
the Treasury's support of the newly unveiled lending facilities
should Congress provide the type of funding outlined in the current
Senate bill.
"If it comes to fruition, this would be very powerful because
$425 billion in loss protection is enormous," said Roberto Perli, a
former Fed economist who is now an analyst at research firm
Cornerstone Macro.
Any action by Congress would also confer an important signal of
political support for the Fed. While the central bank is
operationally independent, its autonomy can be curtailed by
lawmakers if they decide the Fed has misused its authorities. For
example, after the Fed used its 13(3) powers in 2008 to rescue
individual financial institutions, Congress barred the Fed from
doing so again.
House Democrats unveiled legislation Monday afternoon that would
give $50 billion to the Treasury as first-loss capital for the
Fed's small-business lending facility.
That legislation would also allow the Fed, which can only buy
state and local government debt with maturities of six months or
less, to buy longer-dated municipal securities. It would
additionally require the Fed to establish a facility to fund
coronavirus-related municipal debt issued through June 2021.
The Fed announced changes to two lending programs unveiled last
week. One aims to unclog dysfunctional markets for short-term
corporate IOUs called commercial paper, which will now be open to
include highly-quality, short-term debt issued by states and local
governments.
Another seeks to prevent runs on money-market funds, which
investors generally treat as safe as cash. The Fed expanded this
program to include certain municipal money-market funds on Friday,
and on Monday said it would include a wider range of securities,
including around $50 billion in municipal variable-rate demand
notes and $280 billion in bank certificates of deposit.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
March 23, 2020 21:35 ET (01:35 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.