Published on Mar. 24, 2020
Unlimited Quantitative Easing
The Federal Reserve announced a number of actions Monday morning, several of which appear to be unprecedented. Overall, in our view, these are steps in the right direction.
The Federal Reserve expanded its authority to purchase U.S. Treasury and agency mortgage-backed securities in unlimited amounts. The Federal Reserve also added agency corporate mortgage-backed securities to this program, which are loans against multifamily housing units. It similarly broadened its Money Market Liquidity Facility to include more complex municipal debt structures that were not initially covered.
The Federal Reserve also revived the Term Asset-Backed Securities Loan Facility (TALF), a tool it used in the 2008 financial crisis. This facility lends against consumer debt including credit card, auto and student loans, as well as qualified Small Business Administration loans. This will enable banks to continue to lend to consumers, since it knows it can pledge these loans as collateral to the Federal Reserve.
To support the investment grade corporate bond market, the Federal Reserve created two new facilities: one to lend to investment grade corporate borrowers, and another to purchase investment grade corporate bonds and exchange-traded funds that hold those bonds. This is unprecedented. But we know from our own experience at Roosevelt that these markets are not functioning properly. Earlier steps to improve functioning in related fixed income markets were not enough to restore liquidity.
We believe it was appropriate to include exchange-traded funds in this program, since they are an important conduit for liquidity in this market.
We do have concerns that the TALF, corporate bond and ETF facilities may not be enough to stabilize these large markets, and therefore, we believe it is possible the Federal Reserve will have to expand these programs. As a result, we believe it may be necessary for Congress to appropriate more crisis funds for the Treasury to use as it expands these programs.
In Monday morning’s statement, the Federal Reserve alluded to a Main Street Lending facility for small and midsize businesses. We believe this facility, or something like it, will be crucial to mitigating damage to the U.S. economy during the pandemic disruption. In our opinion, such an action is best implemented via the banking system, such as through a Main Street facility, whereby the Fed accepts these loans as collateral with Treasury absorbing the losses. Congress is currently negotiating the size and form of such a package, as one of many items in its $1+ trillion stimulus bill.
The size of any stimulus bill is critical in softening the blow to the economy. We therefore expect additional Federal Reserve actions in the coming days and weeks, some in conjunction with Treasury, and others possibly by Congress.