Fed turns on unlimited QE tap with stimulus to follow

  • Fed turns on unlimited QE tap, stimulus to followFed turns on unlimited QE tap, stimulus to follow
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Market participants were looking to the US Federal Reserve to provide more drastic measures to unclog the liquidity crunch which caught them wrong-footed. The response was a ‘bazooka’ package of unlimited quantitative easing (QE) augmented by direct lending to the private sector. The wide array of policy tools and measures include:

  • Effectively unlimited purchases of Treasuries and asset-backed securities (ABS) "in the amounts as needed"
  • Supporting up to $300bn of credit to the private sector
  • Buying IG corporate bonds in the secondary market
  • Buying IG corporate bonds in the primary market while providing loans to issuers
  • Re-establishing the Term Asset-Backed Securities Loan Facility (TALF) to enable the issuance of ABS

What the Fed has done is to effectively throw the kitchen sink in order to address the unprecedented severe market dislocations which had led to the drying up of liquidity and driving up of volatility. It has taken the rare step of purchasing corporate debts to avert a deeper damage from the stresses on the system.

The importance of absorption of credit risks cannot be understated, and the lending to private companies is a historic move for major central banks. It is also hard to imagine what else they could do to top their announcement of unlimited QE. The announcement effectively means that the increase in the Fed’s balance sheet than that in public debt.

Going forward, although the credit buying program is still limited to $300bn, we can realistically expect it to be raised if current measures do not work. With the Fed already promising unlimited QE, the doubling of credit purchases does not seem far-fetched. Perhaps, we can even expect further unconventional monetary tools like negative rates or yield curve control to be given due consideration.


Double whammy

If the Fed’s actions had ginned up the liquidity in the credit market, the added tonic of the hugely anticipated coronavirus stimulus package of US$2 trillion by US Congress expected to passed Wednesday sent US stocks soaring on Tuesday. The Dow rose by more than 11%while the broader S&P 500 surged more than 9%, the biggest single session rally since October 2008.

While the full details have yet to be unveiled, the fiscal proposal will likely see some $250 billion set aside for direct payments to individuals and families, $350 billion in small business loans, $250 billion in unemployment insurance benefits and $500 billion in loans for distressed companies.

These measures seek to mitigate the impact of the coronavirus (Covid-19) in several ways such as covering the payroll and overheads of small businesses to prevent future layoffs; shore up households and replacing lost individual income from Covid19 -rated related economic dislocations as well as channelled the necessary funds for a proper health care response.

At $2 trillion, the stimulus amounts to more than 10% of the US GDP. Or bigger than the fiscal package during the financial crisis of 2008. It stands a good chance to keep businesses solvent and workers employed and help improve the odds of a 4th quarter recovery back to pre-crisis levels.

While the gin & tonic double whammy from the Fed and the US fiscal package which adds up to $4 trillion has helped to ease market jitters, the third prong will be vital to economic recovery not only for the US but also on the global stage – that of stanching the increases in new Covid-19 case worldwide, with more countries applying lockdowns.

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