Fed’s Kaplan Calls for More Govt Stimulus to Fight COVID-19

The Federal Reserve took its biggest shot at easing monetary conditions in mid-March by lowering the Fed funds rate to zero, but there are other programs it can and likely will do.

For example, the central bank recently eased rules concerning how banks account for their safest assets, which should increase the flow of credit to cash-strapped consumers and businesses during this coronavirus-induced slowdown. By excluding Treasury paper and deposits held at the central bank from the bank’s supplementary leverage ratio, the Fed is manipulating the 3% minimum capital requirement. This effectively means the banks could replace that paper in its assets based with loans to consumers and businesses.

The Fed made it clear that change is designed to give banks more flexibility to grow their assets rather than shrink their capital by increasing shareholder payouts. There were also indications from Fed policymakers that the central bank doesn’t see its role as done or that its arsenal is exhausted now that rates are zero. There are more Fed facilitative actions possible. It was not clear on what.

Separately, in an interview with CNBC, Dallas Fed leader Robert Kaplan said that the country’s elected leaders would likely need to add stimulus to the economy to mitigate the negative effects of the coronavirus-induced economic shutdown. Consumers are under heavy pressure and will struggle to come out of the crisis when the health threat subsidies, he said.

The following statement is interesting as well: “We’re asking the banks to exhibit forbearance on credit situations (our emphasis), and so I think changing the leverage ratio in a crisis is quite appropriate. We want the banks to have as much latitude as possible” to help make central bank and government support programs work most effectively. Sounds like a little bit of arm twisting. He declined to say whether he believed banks should be prevented from paying dividends to shareholders.

And let’s hear it for former Fed chairwoman Janet Yellen. Ms. Yellen said in a video broadcast hosted by the Brookings Institution. “Non-financial corporations entered this crisis with enormous debt loads…. They had borrowed excessively” not always for productive purposes but to fuel buybacks and dividends. Meanwhile, investors let their guard down in the desperate search for yield. Meanwhile investors in fixed-income securities and those living on a pension suffered but this got little attention from the Fed, which has clearly been in keep stock prices up mode.

I’ve said it before and it's worth repeating: corporates engage in entirely too much buyback activity, mainly to veil the effects of management compensation on EPS. Managements always buy too much stock at highs, when the company is flush, and too little at lows, when they are scared but the price is likely accretive.

The yield on the benchmark 10-year U.S. Treasury note was 0.61% vs 0.68% one week previous.

Upcoming FOMC meeting on April 28-29.

Disclosures (show)

Get invaluable analysis of the market and stocks. Cancel at any time. Start Free Trial

Articles Read 2/2

🎁 Unlock 1 extra article by joining our Community!

You are reading the last free article for this month.

Already have an account? Sign In

Want to receive Regular Market Updates to your Inbox?

I am your default error :)