FOMC expands efforts to support the economy

Gary Pzegeo, CFA
March 23, 2020

A summary of the Federal Reserve's actions today.

The Federal Reserve’s actions to date, including a reduction in the overnight target rate to a range of 0.00% - 0.25% and a massive increase in the availability of dollars to fund inventories of Treasury and Mortgage-backed collateral, were thwarted by uncertainty over the economic repercussions of Covid-19 and an absence of credit market liquidity.  The Fed  cannot address the former with policy, but today it has expanded the tool kit necessary to deal with the latter.  This morning, the Fed released statements with the following highlights:

  • Expansion of quantitative easing - The Fed removed a dollar target from the recently announce plan to purchase Treasury and Mortgage-Backed Securities.  They will now purchase those securities in “amounts needed to support smooth market functioning” and will also expand purchases to include certain types of commercial mortgage-backed securities.
  • Launching of 3 credit facilities in the amount of $300 billion with the backing of a $30 billion first loss tranche from the U.S. Treasury, including:
    • The Primary Market Corporate Credit Facility (PMCCF) – to buy newly issued investment grade corporate bonds from qualified issuers,
    • The Secondary Market Corporate Credit Facility (SMCCF) – to buy qualifying corporate bonds and Exchange Traded Funds in the secondary market,
    • Re-establishing the Term Asset-Backed Securities Loan Facility (TALF) – to fund a range of qualified asset-backed securities.
  • Expansion of the Money Market Mutual Fund Liquidity Facility (MMLF) to include municipal Variable Rate Demand Notes (VRDNs) and Certificates of Deposit.
  • Expansion of the Commercial Paper Funding Facility to include high grade tax-exempt commercial paper, and a reduction in the cost to participate in the facility to more reasonable rates.

Legislation currently under negotiation in the Senate includes over $400 billion in additional funds to be allocated to the Treasury’s lending facility that could be used to expand the above facilities to significantly larger amounts using the existing leverage ratios.

We have been monitoring liquidity conditions in credit markets continuously and have seen gradual improvements in “core” Treasury and MBS markets.  Liquidity has been lacking in most other areas and it will take time to assess the impact on secondary and primary credit markets from the above announcements.  Early indications are positive and we will keep everyone up-to-date as we gather more observations in the coming days.

View the full FOMC statement.

Find our ongoing updates, analysis and insights on the potential economic impact of the uncertainty surrounding the outbreak and related events.

 

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.