Fed Chair Jerome H. Powell has made it clear he will do whatever it takes to prevent another Great Depression. His preference has been to act early and boldly to prevent the worst-case scenario from happening during Trump’s trade war and now during the pandemic.
“Powell’s mantra is do whatever it takes for as long as it takes,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “There was a late reaction from Congress and the administration to the unfolding crisis. Powell sized up very quickly that the Fed needed to provide support.”
The Fed cut interest rates to zero on March 15 and unleashed a bond-buying frenzy to prevent markets from freezing up just as companies and households were trying to get loans to survive financially. The result of all of this bond buying is that the Fed’s assets have ballooned to a record level of $6.6 trillion, up from $4.3 trillion in March.
Analysts say the Fed is not done yet. The central bank is widely expected to hold close to $10 trillion soon, as it expands existing programs and starts others.
“Don’t rule out the possibility that the Fed is not done. It could increase the size of programs that have been successful so far or start something else completely new,” said Carl Tannenbaum, chief economist at Northern Trust. “I was at the Fed in 2008. We were throwing a lot against the wall to see what stuck.”
So far, most of the $2.3 trillion the Fed has injected into the economy has come from buying U.S. Treasury’s and mortgage-backed securities, similar to the central bank’s playbook during the financial crisis in 2008 and 2009. Many say the Fed’s actions have helped trigger a rally in stocks in April and an unfreezing of many parts of the bond market.
But the Fed is about to embark on something it has never done before: Directly buying corporate bonds, directly buying debt from cities and states, and making “Main Street” loans to midsize firms. These are far more complex and politically sensitive moves than buying U.S. Treasury bonds, but Fed leaders argue they are necessary to keep plenty of credit flowing at a time when so many businesses, households and local governments desperately need loans.
Investors and businesses await more details on when the Fed will role out these programs and how widely they will buy. Oil companies and retailers are especially hoping the central bank will buy their debt, a lifeline that could help some firms avoid bankruptcy. The Fed, however, has delicate choices to make because it is not supposed to bail out specific companies, especially ones that took on too much risk.
Trump and at least one former Fed official have also called for negative interest rates in the United States, something Powell has been hesitant to endorse because it has not been easy to reverse that policy in Europe and Japan. It also does not seem warranted when loans are already cheap.
“Slightly cheaper credit doesn’t make any difference if stores are closed,” said Ian Shepherdson of Pantheon Macroeconomics.
Another fear is that the Fed could trigger an ugly spell of high inflation like what the United States experienced in the 1970s after the central bank arguably kept interest rates too low.
“It does beg the question of how far Washington can go in issuing and monetizing debt before everyone pays a price in terms of higher interest rates, higher taxes and higher inflation,” said David Kelly, chief global strategist at JP Morgan Funds.
For now, the Fed’s statement and Powell’s news conference Wednesday are likely to commit to seeing the economy through this crisis but remain a little vague on the details to maintain flexibility. So much uncertainty remains about when parts of the economy can reopen safely and when a coronavirus vaccine will be widely available.
“The Fed is playing a confidence game, and its communications should continue to repeat the message that it will do whatever it takes to nurse the economy back to health,” economist Michael Feroli of JP Morgan wrote in a note to clients.
Source: www.washingtonpost.com
