Fed Going All In to Save Economy. Here’s What Could Come Next
(Bloomberg) -- The Federal Reserve rolled out several measures this week to support the economy and re-liquefy financial markets reeling from the shock of an unprecedented shutdown. It ain’t done yet.
Among possible options: The central bank could explicitly expand its purchases of Treasury and mortgage-backed securities and open up new targeted lending facilities as it struggles to contain the fallout from measures to halt the contagion, Fed watchers said.
“You don’t want to stop too soon,” said Lou Crandall, chief economist at Wrightson ICAP. “You want to make sure you’re safely back to more stable conditions.”
In the space of a week, the Fed has gone through many of its crisis-era moves in its effort to fight the contagion. It’s cut interest rates to zero, launched a minimum $700 billion quantitative easing program and opened emergency lending windows to support commercial paper issuers and money market funds.
On Friday, the Fed did venture beyond its established playbook, expanding an emergency financing program for money market funds to include those that buy short-term municipal debt -– something it avoided doing during the 2008 financial crisis.
But it’s under pressure from the financial markets and lawmakers to do even more for cash-crimped borrowers from corporations to state and local governments.
Friday’s action, for instance, stopped short of what Democratic congressional leaders want -- and where some ex-central-bank officials think it should go -- to help embattled municipalities on the front line in the war against the virus.
Former Fed Vice Chairman Alan Blinder said the central bank should use its existing authority to buy municipal debt outright. Under Section 14 of the Federal Reserve Act, the central bank can purchase municipal debt with six months or less to maturity.
Blinder, now a professor at Princeton University, said Congress should broaden that authority to allow the Fed to buy longer-term debt issued by states and local governments.
Democratic Senator Bob Menendez of New Jersey has proposed doing just that: He’s pushing an amendment to the Federal Reserve Act so the Fed could buy longer-dated muni bonds outright.
The $3.9 trillion municipal-bond market isn’t the only one that has nearly broken down in the dash for cash by investors.
Mortgage-backed debt has been hard hit as well, despite a pledge by the Fed to buy at least $200 billion of the securities to stabilize the market.
“Part of the goal of their purchase program was to provide liquidity and for the most part it has not worked,” said Ajay Rajadhyaksha, head of macroeconomic research at Barclays Capital in New York, who expects the Fed to raise purchases to $500 billion.
A corresponding increase in Treasury purchases -- the Fed has promised to buy at least $500 billion of them -- also seems likely, Fed watchers said.
Since announcing the move, the central bank bought $272 billion of Treasuries and $68 billion of mortgage-backed securities this week, according to New York Fed data compiled by Bloomberg Intelligence and Bloomberg News.
In a video for clients, Cornerstone Macro LLC partner Roberto Perli laid out a series of additional steps the Fed could take.
They include reactivating a term-auction facility to provide liquidity to banks and launching special lending windows for municipalities, corporations and small businesses.
“All of this is on the table,” the former Fed official said.
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