Does The Fed Have Any Ammo Left?

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So, far, the Fed has done an enormous amount of heavy lifting to try to keep the U.S. – and global – economy afloat during this unprecedented crisis, which – just so far – easily dwarfs the 2008 financial crisis in severity. As scary as things were back then, with many of the largest financial institutions in the world threatened with collapse, we didn’t have to worry about thousands of people dying as a result. This crisis is far worse, and we still haven’t the vaguest notion of how bad it still might get.

Let’s review all of the various Fed moves since the beginning of this month, then let’s talk about what else it might be able to do:

  • On March 3, the Fed held its first of what would be two emergency meetings this month, announcing a 50-basis point rate cut in its benchmark federal funds rate to a range of 1% to 1.25%. That move bombed.
  • It followed that up less than two weeks later on March 15 – a Sunday no less – with another 50 bp cut, to a range of 0.25% to zero. That also had little effect.
  • At the same time, the Fed said it would increase “over coming months” its holdings of Treasury securities by at least $500 billion and its holdings of mortgage-backed securities by at least $200 billion. However, by the end of last week, the Fed had already bought about $275 billion of those securities. As the Wall Street Journal pointed out, “this means the Fed will have bought more than half of the $500 billion in Treasury securities in one week with little sign of restored market functioning, pointing to a growing likelihood for a much more aggressive round of purchases.”
  • The Fed created a Money Market Mutual Fund Lending Facility that would make loans to banks secured by assets from money market funds, similar to what it did during the 2008 crisis, although this time, it would be purchasing a broader range of assets. On Friday, it extended the facility to include short-term debt issued by cities and states.
  • The Fed also said it was creating a new Primary Dealers Credit Facility that would provide major players in the government securities market with short-term loans.

As bold as all of these moves have been, have they actually done anything to restore public and investor confidence? Hardly. While the Fed has driven already low-interest rates back down to zero, it doesn’t mean very much when nobody wants to own any financial assets – whether it’s Treasury bonds or gold or anything else. Not blaming the Fed, but there’s only so much it can do when just about everyone is acting like the world is coming to an end.

But is there more it can do, either under its existing powers or some new Congressional mandate? Maybe.

In my previous column, I suggested the possibility that the Fed be given the power to buy common stocks. A market that desperately cries out for an enormous investor to step in and start buying, like J.P. Morgan – the man, not the current bank that bears his name – used to do about 100 years ago during the country’s myriad financial panics. This would require Congressional approval, but this is a crisis of monumental proportions, so desperate times call for desperate measures. As I noted, the Bank of Japan is the largest investor in Japan’s stock market, so this move wouldn’t be unprecedented by a central bank.

I don’t see the point of the Fed buying corporate bonds, as has been mentioned if it’s just going to shore up highly-rated companies that don’t need it. If the Fed is going to start buying corporates, it really needs to start with junk-rated securities, which do need the help, but do we really want the Fed doing that? Then again, if the government can promise a lifeline to airlines, cruise ship lines, and various other industries, why can’t the Fed also chip in and help them?

The Fed has already told the banks it regulates to ease up collections on delinquent or about-to-become delinquent customers until the crisis passes, as some of them are already doing. Maybe it should make it an official order, so the banks actually follow through on their promises.

While it’s great that the government, on the fiscal side, is going to start handing out $1,000 checks, or whatever the final amount is, to most Americans, how far is that money actually going to go for the typical American in need? Not to belittle free money, but $1,000 will only cover about one month’s rent or mortgage payment for many people if that. It’s simply not enough – not even close.

Since the Fed is already intervening in the commercial paper market by backstopping it, perhaps it can do the same in the consumer lending business. Why not set up a Special Consumer Lending Facility, run through the banking system, offering no-interest loans to consumers payable over five years? I bought my bed that way, so why can’t the U.S. banking system do the same for millions of now-desperate consumers, and the Fed agree to buy these loans from the banks? It would probably cost a lot less than making loans to equally desperate corporations, but it would put a lot of money in the hands of people who need it now.

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George Yacik
INO.com Contributor – Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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