What else can the Fed do to blunt coronavirus impact?

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By Hannah Lang and Jim Dobbs

WASHINGTON — The Federal Reserve made clear Tuesday that it was willing to go further than cutting interest rates to mitigate the economic fallout from the coronavirus.

But following its revival of a facility backing commercial debt and the establishment of a separate credit facility for primary dealers, the question still looming over the Fed is just how far is the central bank willing to go to keep credit flowing to consumers and businesses.

“They may have to get creative here because liquidity throughout the system is freezing,” said Mark Zandi, the chief economist at Moody’s Analytics.

The commercial paper facility announced Tuesday resembles one the Fed put in place during the 2008-era mortgage crisis. The agency reestablished the backstop under its emergency powers in section 13(3) of the Federal Reserve Act, following criticism that its previous actions to cut the federal funds rate to zero in response to the crisis were insufficient.

Fed Chairman Jerome Powell has suggested that the central bank could issue more forward guidance and direct more asset purchases. But Powell has also urged the White House and Congress to take actions on their own.
Fed Chairman Jerome Powell has suggested that the central bank could issue more forward guidance and direct more asset purchases. But Powell has also urged the White House and Congress to take actions on their own.

Yet immediately after the Fed announced the facility, observers were divided between those who see the actions as the full extent of what the Fed can do, and those who believe the Fed may feel compelled to do more.

“Our expectation remains that pressure will build on the Federal Reserve to expand its use of 13(3) to ensure there is sufficient credit flowing to businesses and households,” said Jaret Seiberg, an analyst with Cowen Washington Research Group, in a note.

Read more: Complete coverage of the coronavirus impact

Zandi said the Fed could consider launching more credit facilities to help other parts of the liquidity market, such as asset-backed securities. Yet he and several others said the Fed has already flexed its muscle in response to the virus outbreak, and can only do so much.

"[The Fed is] running out of room to maneuver here,” said Zandi. “The onus is quickly shifting or has already shifted to the Trump administration and Congress to enact fiscal stimulus.”

Indeed, much of the focus this week has been on economic stimulus proposals from Congress and the White House, including the idea of giving all Americans direct cash payments.

The establishment of the two credit facilities were just the latest actions the central bank has taken in recent weeks to ensure that credit is available as fears about the coronavirus have grown rapidly.

The liquidity backstop for commercial debt issuers will allow consumers and businesses to bypass banks to gain access to credit, which will “ensure the smooth functioning of this market” during a period of economic stress, the Fed said.

The move was widely anticipated as a part of the Fed’s larger recent efforts to inject as much liquidity as possible into the financial system — a move that resembles the central bank’s playbook during the financial crisis.

“Now we have a situation where we could potentially have solvency issues for companies and for households, so the Fed unequivocally realizes that and they want to avoid any type of credit freeze or any breakdown in lending facilities, and that's why they've pumped so much money into short-term financing,” said Dec Mullarkey, managing director at SLC Management.

The commercial paper market is a critical short-term lending facility for businesses, many of which frequently use the market to pay their bills or make payroll, said Zandi.

“If [businesses] can't issue commercial paper or a short-term IOU, and can't raise the money, then they're going to shut off lights and cut jobs, and that's going to be cataclysmic for the economy,” he said. “So this is absolutely necessary.”

The new facility could also help small businesses and consumers who may not have directly benefitted in the near term from the Fed’s emergency rate cuts this month.

“It’s not a cure-all, but it should help get things churning again,” said James Bradshaw, an analyst at Bridge City Capital.

Mike Matousek, a trader at U.S. Global Investors, said uncertainty around the ultimate impact of the novel coronavirus on the consumer-driven economy gives the Fed reason to establish a new facility, among its other steps, to speed up response and help people whose finances are directly impacted by the pandemic.

“We are almost certainly going to see a recession, but how long and severe it is depends in part on whether programs like this are rolled out efficiently and are effective,” Matousek said.

The Fed has additionally encouraged banks to lend via the discount window and announced $700 billion in asset purchases on Sunday night. The agency along with the other bank regulators have also taken steps to encourage financial institutions to use their excess capital and liquidity buffers to boost lending and other supportive measures.

Fed Chairman Jerome Powell has suggested that the central bank could issue more forward guidance and direct more asset purchases. But Powell has also urged the White House and Congress to take actions on their own.

“We don’t have the tools to reach individuals and particularly small businesses,” Powell said at a press conference on Sunday. “But this is a multi-faceted problem, and it requires answers from different parts of the government and society.”

At this point, the Fed has done “pretty much all [it] can,” said Mullarkey.

“I do give the Fed a lot of applause for the leadership they're showing here, and they're doing it very emphatically, and they're pretty much pulling out all the stops they can to show we're going to do whatever it takes here, for our part,” he said, “but the handoff is now moving over to fiscal policy and governments have to move quickly on that.”

Congress has already passed a massive spending bill focused on the public health care system, and the House passed a bill last week to address sick leave, unemployment insurance and food stamps, but there is mounting pressure on Congress to do more.

Meanwhile, some worry that extreme actions by the Fed could backfire.

Some investors viewed the Fed's interest rate cuts as the restart of the "quantitative easing" policies, an extraordinary series of interventions the agency took following the 2008 crisis.

Additional near-term action could signal to Wall Street that the Fed is concerned that the U.S. economy is teetering on the brink of something much deeper than a short-term recession.

“Hitting this so hard right off the bat, especially with rates, they’ve already spooked investors,” Matousek said. “More people will start asking, ‘What does the Fed know that we don’t?’ And that can snowball beyond what we are already seeing.”

But at the same time, the Fed has also been under pressure to open its tool chest to deal with a new kind of financial crisis.

Some critics said the rate cuts were an inadequate response to help those most in need of assistance. In a statement Monday, House Financial Services Committee Chair Maxine Waters, D-Calif., called on the Fed to “provide much-needed support to those who are on the front lines of this pandemic.”

Former Federal Deposit Insurance Corp. Chair Sheila Bair told MarketWatch Monday that she agreed the Fed needed “to get creative.”

“Lowering interest rates to zero doesn’t help if businesses can’t pay their loans back and they don’t have cash flow,” she said. “We need to get help out there, especially to small businesses and people already losing their jobs.”

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Coronavirus Federal Reserve Lending Commercial paper Liquidity Maxine Waters Jerome Powell Money market funds
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