Will Fed Bazooka Be Enough? Virus Panic Needs to Subside

Vito J. Racanelli

The Federal Reserve has shot its bazooka. We’ll see what it accomplishes in the next few months. You can’t tell by the most recent wild week in U.S. stocks. For more on this see page 1.

As I’ve pointed out, markets fear the uncertainty of the coronavirus spread, but fear the knock-on economic effects even more, as they could last much longer. For more on this see pages 3 and 11. China and South Korea have contained the spread. I think it will be contained here eventually. However, the impact on business and employment is why the Fed used the biggest weapon in its arsenal. Other central banks around the world followed in due course with a slew of copycat rate cuts during the week.

The Bank of England cut its benchmark interest rate to a record low and said it would buy £200 billion of U.K. government bonds. European Central Bank policymakers joined the party, launching a new €750 billion bond-buying program, hoping it will help reduce concerns about the more debt-laden nations in the eurozone, as spending demands increase.

In a move to calm markets, where all have abandoned pretty much all asset classes and moved to cash, the Fed is hoping to help improve liquidity. Last Sunday it cut the Fed funds rate to near zero from 1.00%-1.25%, itself a level reached only days ago in a previous cut. The last time the rate was zero was during the financial crisis of 2008-09.

The Fed is also opening up the spigots and piling debt onto its balance sheet through the purchase of $500 billion in Treasury securities and $200 billion in mortgage bonds over the coming months, in an effort to address unusual strains in those markets, too. The Fed is lending dollars to other major central banks, up to $60 billion in a six-month temporary program to nine central banks, to alleviate strains in financial markets.

Unfortunately, it might be weeks or even months of a dyspeptic market before we see sustainable results. Additionally, some are calling for the Fed to relaunch a facility along the lines of its 2008 Commercial Paper Funding Facility, to forestall investors from becoming reluctant to purchase short-term commercial debt.

According to The Wall Street Journal, market participants are increasingly upbeat the Fed’s deluge of cash and other support is starting to improve market conditions.

Some said stress was easing in the repo market, where firms borrow and lend cash and securities overnight and through 14-day loans. The repo market has struggled in recent months with not enough cash, causing upward pressure in short-term rates.

The yield on the benchmark 10-year U.S. Treasury note arose to 0.85% Friday, after reaching historic lows around 0.50% a few days ago.

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Vito J. Racanelli
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