But the Fed’s emergency pandemic lending programs are just getting started. President Jerome Powell should reiterate that the Fed will deploy its full range of liquidity supports when it speaks to reporters Wednesday after a two-day policy meeting – even if it is hardly needed at the moment.
There is also concern that the economy may lag behind, as double-digit unemployment is drilling holes in consumer demand and growing business incomes. Even though the job market fared better than expected in May, unemployment at 13.3 percent is well above the peak of the last recession.
Central bankers are unlikely to be deterred as much by their credit support as by their monetary policy until the unemployment rate approaches their estimate of full employment at 4.1%. Fed officials will release new forecasts this week.
“What the Fed has done is to prevent an economic crisis from becoming a financial crisis,” said Julia Coronado, founding partner of MacroPolicy Perspectives LLC and former Fed economist. “They will not say it is time to start backing up. They will not take this for granted when they see the manual working. ”
The Fed has yet to roll out key elements of its corporate lending programs, and authorities could further accelerate the rally if they announce a decision to speed up Treasury purchases.
The Fed’s current purchase of government bonds is intended to keep the market working. But officials could redirect their purchases to deliberately stimulate demand in the economy, by squeezing yields on risk-free treasury bills and sending investors to rush into higher-yielding debt.
“Belts and suspenders”
“The programs do a lot of work on credit spreads, but the total cost of financing includes the spread on the risk-free rate,” said Michael Feroli, US chief economist at JPMorgan Chase & Co. He said the The Fed will adopt a belt and suspenders approach to pursue credit easing policies and announce an $ 80 billion per month program in longer-term treasury purchases during its next two meetings.
The Fed announced on March 23 two corporate credit facilities of up to US $ 750 billion, taking a drastic step in direct financing for large companies. Since then, investment and high-yield companies have experienced a record wave of borrowing, taking advantage of strong investor demand that the Fed has also encouraged.
The primary market business credit facility will purchase bonds directly from businesses, as well as syndicated loan tranches. The program is expected to launch in the next two weeks, according to people familiar with the subject.
The secondary market facility purchases high-quality, high-risk, high-yield bond-traded funds, in addition to bonds already traded on the market. Only ETF purchases are underway, with US $ 4.3 billion in the Fed’s portfolio as of June 2.
“Before buying a single bond or a single ETF, the liquidity crisis was over,” said Hans Mikkelsen, senior credit strategy manager at Bank of America Corp. “The Fed does not need to do more. It is a fait accompli. ”
One of the reasons why other components of the programs have been slower to start is that they are complicated. For example, a company must be able to demonstrate that it has significant operations and a majority of its employees based in the United States for its obligations to be eligible. To obtain a direct loan, the company must also certify that it could not obtain “adequate credit” in the private markets at a normal rate.
These requirements could result in modest participation once the programs are fully operational. Fed officials are unlikely to worry: they created the programs as a backstop, not to replace private sector sources of credit.
Looking at the Fed’s guidelines for its director, BlackRock Inc., it is tempting to think that the central bank’s work is done. The guidelines note three objectives: to support corporate debt markets to facilitate an “orderly” pricing of risk; support for the primary broadcast at costs that reflect normal conditions; and reduce fire sales.
A spokesperson for BlackRock declined to comment, as did a spokesperson for the New York Fed.
Risk premiums on high-yield debt and high-quality bonds have essentially been cut in half since the Fed announced the programs. And assign one for the next goal, too, when you look at companies like Amazon.com Inc. setting record borrowing costs in their recent bond deal. Others, like Norwegian Cruise Line Holdings Ltd., continue to pay heavily to access new funds, reflecting its fundamental operational stress in relation to distorted liquidity.
Fire sales can be more difficult to satisfy. Although market liquidity has improved significantly since mid-March, when the pandemic first broke out in the United States, more businesses are in distress than ever, and bankruptcy filings are on the pace of rival figures last seen during the Great Recession.
The Fed has made it clear that its job is not to bail out bankrupt businesses. By sticking to its mission to provide a safety net for corporate debt, investors are wondering if much remains to be done.
“By investing so much in corporate credit, investors have taken over and fixed it for them,” said Elaine Stokes, portfolio manager at Loomis Sayles & Co. come back here if you need us.