The Fed Goes Past All-In. Congress Drags Its Feet.

The U.S. Federal Reserve (the Fed) announced a barrage of policy measures this morning that collectively were both impressive and creative.

  • The main asset purchase program (previously $700 billion of Treasuries and mortgage-backed securities (MBS) was upgraded to have no dollar limit—effectively a whatever-it-takes approach to ensuring market functioning and accommodative financial conditions—and broadened to now also include commercial mortgage-backed securities (CMBS).
  • New purchase programs were announced of investment-grade corporate bonds in the primary and secondary market totaling $200 billion.

    Two notes here:

    First, the Federal Reserve Act does not allow the Fed to buy corporate bonds, but they seem to have gotten around the rules with an equity injection from the Treasury, their emergency powers under Section 13-3 and lending funds to a special purchase vehicle that will implement the purchases. Very creative.

    Second, in terms of the details, there's a provision that the Fed will allow companies to avoid paying any interest on the bonds for six months (subject to restrictions on dividends and buybacks) and has reserved the right to extend this provision as warranted. It's not quite as powerful as a cash injection, but those terms are about as good as it gets from a central bank.
  • Among other facilities, the Fed also teased a soon-to-be-announced “Main Street Business Lending Program” to support small business loans. We suspect the funding for this initiative is being negotiated as part of the current Senate bill. Details are in flux, but reports have suggested the Senate could earmark $425 billion of funding that the Fed could then lever up 10 times to $4.25 trillion for this program and others, similar to what was done with the corporate bond purchase programs today.

Markets awaiting U.S. fiscal stimulus package

As of midday Pacific time, the U.S. and global equity markets are off a couple of percentage points. The Senate had conditioned investors to expect its stimulus bill to pass today. While the politicians say they are “close to a deal,” two votes have already failed today and skepticism is setting in.

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