Saying “our economy will face severe disruptions,” the Fed announced early today an open-ended commitment to buy assets.
It will purchase $375 billion in Treasury securities and $250 billion in mortgage-backed securities this week—a near QE Infinity—to support credit markets. That’s on top of last week’s $700 billion announcement.
It will also begin buying commercial mortgage-backed securities. And, for the first time, the Fed will start buying investment-grade corporate bonds in the primary and secondary markets, and through ETFs.
Among its measures, there were a number of other programs, including two facilities to support credit to large employers. It soon expects to announce the establishment of a Main Street Business Lending program.
At this point, the Fed is trying to cover all aspects of the credit markets amid the turmoil being generated by the COVID-19 epidemic.
Yet, despite disruptions in the Treasury, corporate, commercial paper, and money funds markets (and ETFs) we have not had a systemic event nor have markets come close to stress levels seen in the financial crisis. The Fed is desperately trying to stay ahead of the curve.
I wish the same could be said of fiscal policy. Fear of the virus has the economy in a smackdown. The economic uncertainty is enormous, and discounting future earnings is incredibly difficult right now.
Here lies the problem. Markets attempt to price in future events, and forecasts are all over the place when it comes to what will happen next month, Q2, and when we might see an economic recovery.
JPMorgan Chase & Co. expects GDP to shrink at an annualized rate of 14% in Q2, while Bank of America and Oxford Economics both see a 12% drop. Goldman Sachs Group Inc. sees a 24% plunge (Bloomberg).
St. Louis Fed President James Bullard said Sunday night the unemployment rate could rise to 30% and GDP could take a 50% hit. Reality – no one really knows.
Never have we seen such discrepancies! Typically, the range for GDP is about a full-percentage point.
Programs aimed at supporting small and larger businesses are an excellent step in the right direction, and it could save some jobs until demand bounces back.
But will small business owners access these lifelines? How many bureaucratic hoops will they need to jump through? How can apps be quickly processed? How fast can cash be infused into companies that can’t meet payroll?
What looks good on paper must be quickly put into practice.
Capitalism vs government intervention
Though we argue around the edges about the need for regulation, most folks believe in free markets. I’ve met business owners who are Democrats and I’ve met business owners who are Republicans.
They wouldn’t own a business if they didn’t adhere to free-market principles in some form.
But today, even staunch proponents of free-market capitalism acknowledge that intervention by the Fed and fiscal stimulus from the government are needed amid the fear created by an exogenous event–COVID-19.
They do not adhere to a rigid ideology when circumstances dictate, especially when state and local governments are forcibly shutting down businesses.
Yes, intervention isn’t cheap but the bill will be much higher if key industries collapse.
The COVID-19 crisis will eventually peak, people will venture out and spend, and we will see an economic bounce.
Greater transparency on the economy, which won’t be immediately forthcoming, should help. Stabilization of new cases and major fiscal stimulus could go a long way in lending support.
But fiscal stimulus from Congress is needed yesterday. Congressional bickering has to stop. Leave your agendas at home.
