Federal Reserve Chairman Jerome Powell promised Friday to use untapped firepower to bolster the U.S. economy if a second wave of coronavirus infections hit the U.S., as more states unfurl plans to reopen after roughly two months of lockdowns.
A lot has happened since late March when the Fed said it would offer more than $2 trillion in emergency loans to Wall Street and Main Street to help them stay afloat during national lockdowns imposed by officials looking to prevent new coronavirus infections.
Bankers and investors, working from home, have kept the credit markets open. Highly rated U.S. companies already borrowed a record $1 trillion in the bond market in the first five months of 2020, the fastest start to a year ever, even though corporate profits have plunged.
U.S. stocks also have rallied, leaving the Dow Jones Industrial Average
at the end of May only 14% off its February all-time highs, even while tensions between Beijing and Washington flared once again and threatened to dampen optimism emboldened by the Fed’s unprecedented backstops.
But Wall Street’s bullish blush, despite millions looking for work, also raises questions about if the Fed needs to fully deploy its arsenal of emergency funds.
Here’s the latest:
May 28: The U.S. Treasury Department injected about $31 billion of equity into the Fed’s credit facilities, ramping up the central bank’s funding capacity as it expands its balance sheet to more than $7.1 trillion.
Primary and Secondary Market Corporate Credit Facilities
May 28: While the Fed’s balance sheet shows the primary market corporate credit facility has yet to make any purchases, its secondary facility, which buys existing corporate debt, has been ramping up its purchases of corporate debt exchange-traded funds.
April 19: The Fed beefed up both corporate credit facilities to provide up to $750 billion worth of credit, including to newly “fallen angels,” or companies whose BBB credit ratings have been downgraded to junk territory. However, the facility won’t fund banks that take customer deposits or companies that received specific support from the $2.2 trillion CARES Act.The facility was announced on March 23 as the sector was being pummeled by record outflows. The idea has been to prevent companies facing pandemic fallout from shedding employees and business relationships, which could further damage the economy.
May 29: Fed’s Powell says it will be making loans within days out of its $600 billion Main Street Lending Facility, which now includes bigger firms with more employees. That means up to $5 billion in annual revenue, up from $2.5 billion initially. The Fed also lowered its minium loan size to $500,000 from $1 million, potentially pitting smaller companies against big, household names for emergency funding.
Congress also is looking at shaking up the Paycheck Protection Program, after it injected another $320 billion into the Fed’s initial $350 billion program, in part because the uptake among businesses has slowed, after its first pot of funds in April quickly ran out.
May 28: The $500 billion facility is expected to get up and running shortly. Although, New York’s Metropolitan Transportation Authority on May 21 already issued an “urgent’ call to Powell for direct access to the program, reports the Bond Buyer. The program is aimed at buying bonds directly from states and cities. In April, it was expanded to allow in smaller locales. Initially, the plan in March was to tackle problems in the short-term money-market sector, but as yields elsewhere soared, the Fed on April 9 unfurled the municipal loan program.
Term Asset-Backed Securities Loan Facility (TALF 2.0)
May 12: Fed spells out TALF terms, potentially getting the facility ready to start making purchases in June. This comes after its April 9 expansion to include existing AAA-rated commercial mortgage-backed securities, or bonds used to finance office towers, shopping malls and other commercial property types. Some collateralized loan obligations, which are funds that buy loans to debt-laden companies, also are eligible. The size of the facility stays at $100 billion. On March 23: Fed revived TALF, giving companies like Ford Motor
and others involved in supplying consumer credit an easy way to sell new asset-backed bonds for funding without much risk.
May 28: The amount of mortgage-backed securities held by the Fed rose nearly each week since mid-April to about $1.8 trillion, versus $4.1 trillion of Treasurys holdings. In a dramatic move on March 23, the Fed said aggressive action was needed to soften the blow of the pandemic. It vowed to buy an unlimited amount of government-backed bonds, including some commercial mortgage debt. March 15: Plan was to buy at least $700 billion of U.S. Treasury debt and “agency” mortgage bonds, or assets with government backing, as investors were being forced to sell even safe-haven assets to raise cash.
Currency swap lines:
May 28: Fed exposure to central bank currency swaps has been climbing since April. In March, the Fed and five other major central banks move together to bolster their global funding efforts in the U.S. dollar funding, after global market volatility led to a desperate dash for U.S. dollars, the world’s reserve currency, writes MarketWatch’s Greg Robb, Earlier in March, the Fed set up $30 billion to $60 billion worth of U.S. dollar swap lines with nine central banks in Asia, South America and Europe, for the next six months, adding to its standing facilities with Canada, England, Japan, New Zealand and the European Central Bank.
Primary Dealer Credit Facility
May 28: The use of the facility by Wall Street has fallen to about $6 billion, after it kicked off in April to supply key dealers of securities on Wall Street with up to 90-day loans to jump-start trading and boost liquidity across financial markets. Collateral ranges from existing commercial paper to municipal bonds to asset-backed securities, as well as equities.
May 28: Fed holdings in this facility continue to grow. Section 13(3) of the Federal Reserve Act was invoked in March to start providing a backstop for this key source of short-term funding for big businesses. It is a roughly yearlong program that aims to support the real economy, rather than just the financial sector, by helping businesses meet payrolls, inventory payments and other short-term liabilities.
May 13: Forget about negative interest rates in the U.S., says Powell. The Fed already slashed benchmark rates by 100 basis points to a range of zero to 0.25% in a surprise weekend move on March 15 that also unleashed its balance sheet to help lenders, businesses and households absorb the shock of daily American life grounding to a halt.
Since chaos erupted in the overnight lending market in September, the Fed has offered billions of dollars’ worth of short-term loans to Wall Street’s roughly two dozen “primary” securities dealers to help ease pressure in this key corner of the market.
What do market participants say?
“The markets are telling us: The worst is over for the economy as America starts to reopen,” said Jack Janasiewicz at Natixis Investment Managers, in emailed commentary.
He pointed to housing, at roughly 18% of the economy, as being a bright spot that isn’t being talked about enough.
“The XHB (home builders) index
hit bottom on March 23 and since then is up 75%. With rates low, a shortage of supply and mortgages available, home builders are positioned for a rebound.”