• This morning, the Federal Reserve announced a whole host of measures to support the U.S. economy. The moves included:
    • Making its asset purchase program open-ended (effectively unlimited) and also including the purchases of commercial mortgage-backed securities. Previously, the Federal Reserve had pledged to purchase $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities.
    • Creating three new lending facilities to support the flow of credit to households and businesses. Together, this will provide $300 billion in new financing, while the Department of the Treasury will provide $30 billion in capital to the facilities.
      • The Primary Market Corporate Credit Facility (PMCCF) will be a funding backstop for corporate debt, purchasing bonds from, and issuing loans to eligible corporates. Loans can be up to four years in length, with zero interest in the first six months.
      • The Secondary Market Corporate Credit Facility (SMCCF) will purchase secondary market corporate bonds such as individual corporate bonds, and eligible exchange traded funds (ETFs).
      • The Term Asset-Backed Securities Loan Facility (TALF) will support the flow of credit to consumers and businesses by the Federal Reserve will lend to holders of certain highly rated Asset-Backed Securities. Loans made under this facility will be three years in length.
    • Expanding the previously established credit facilities, the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF), to boost liquidity in the money market mutual fund and commercial paper markets.
    • The Fed will soon establish Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses.

Key Implications

  • The Fed once again is showing its ability to respond quickly in times of need. It pulled out another showstopper this morning, reaching deep into its toolkit to ease the liquidity squeeze seen across various segments of the credit market.
  • By establishing various lending facilities that are both well-funded and have favorable terms, the Fed moved to ease strains popping up across several credit markets. Just as important, it announced it will not limit its asset purchasing program to any amount. A sign that the Fed will pull out all the stops to support the U.S. financial system during this uncertain period.
  • With the policy initiatives today, the Fed is showing fiscal authorities how it’s done. It has implemented measures that contain both breadth and depth to help cushion the impact of the COVID-19 outbreak. But monetary policy can only go so far. The stage is now set for a strong fiscal response.

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