Federal Reserve Chairman Jerome Powell is right: The central bank is nowhere near out of the ammunition it has to fight the current economic slump.
In fact, the Fed has yet to even take some of its weapons out of their holsters. In other cases, Powell’s institution has only begun to leverage up the potent arsenal it has against a locked-down economy and sluggish financial markets.
All told, the Fed has been given the ability to put some $2.6 trillion to work of which it has deployed about $100 billion. That potential figure is equal to 12% of the U.S. economy and doesn’t include the open-ended asset purchases the Fed can conduct nor the power it has to keep borrowing rates around the lowest they’ve ever been in the nation’s history.
No wonder Powell provided assurances during an interview on the CBS program “60 Minutes” that “we’re not out of ammunition by a long shot.”
The market has come to respect the Fed’s power, and the chairman’s comments helped get a rally started Monday that only boomed higher on news that what Powell said is the linchpin of a sustained recovery — a coronavirus vaccine — could be closer than we think.
“In terms of ammunition, they really haven’t used up a lot of the funds that they’ve been allotted already,” said Kathy Jones, head of fixed income and currency strategy at Charles Schwab. “They’ve got the capacity to do a whole heck of a lot more.”
The Fed has instituted a slew of lending facilities aimed both at the big firms that took the focus of the 2008 financial crisis but in this case more so directed at small businesses and individuals whose livelihoods have come to a halt because of efforts to contain the pandemic.
At a scale unimaginable during the last crisis, the Treasury has provided seed capital that the Fed can leverage up to for funding in a variety of ways. With all that ammunition available, the Fed may not even need additional weapons.
‘Guns blazing’
“They came out really guns blazing. That was intentional because they had this playbook created after the financial crisis,” Jones said. “Now, though, they’ll let that play out for a while and see what happens before they deploy new tools.”
It’s not that there aren’t new tools to deploy.
Among those Jones listed are yield curve control, where the Fed can target longer-dated bond yields, and asset purchases more along the lines of what happened during the financial crisis. That program of outright quantitative easing sought to drive down bond yields and push investors into riskier parts of the financial markets whereas the bond purchases now are targeted more at market functioning.
There’s also simple jawboning, in which Fed officials can use enhanced “forward guidance” to commit to keeping current policies in place until goals, such as full employment and a healthy inflation level, are achieved.
For now, though, the Fed is likely to flood the economy with money on whatever level is appropriate.
“The Fed, with the Treasury, is going to lend more. And then lend more next year,” said Steve Blitz, chief U.S. economist at TS Lombard. “He said they’re going to extend credit. He didn’t say we’re going to buy equities, he didn’t say we’re going to buy more corporate bonds. He didn’t say we’re going to own the capital markets. What he said is we’re going to extend credit, and he’s exactly right.”
Indeed, while the Fed has approved at least nine different facilities to assist markets and provide lending power, it has yet to put several of them to work. Specifically, the Term Asset-Backed Lending Facility has yet to begin lending and the much-anticipated Main Street lending program, targeted toward medium-sized businesses, has not loaned out a dime.
An intention to buy municipal bonds as well as corporate bonds on the primary market also remain unused, and a secondary-market credit facility, aimed at ETFs that track speculative-grade corporate debt, just started last week.
For the Fed, merely stating that the programs are at the ready has helped quell market anxiety.
Focus on Main Street
Blitz said the Fed’s mindset is likely to be one where it uses it keeps the programs at the ready and deploys them as necessary. The programs are set to expire Sept. 30 but could be extended depending on need.
“This thing is going to ramp up. Whether it’s direct from the Fed or more likely from the banks, this is not going to end,” he said. “You have a credit-constrained private sector. What you want to do is prevent the implosion of businesses, which then rolls right into the commercial real estate sector and all of that ends up impairing banks. The Fed has always in its mind first and foremost protecting the banking system.”
Still, the Fed has taken much greater pains during this crisis to direct programs at Main Street instead of just Wall Street.
In his “60 Minutes” interview, Powell stressed the importance of helping individual workers and small businesses displaced because of the coronavirus. Investors largely took his tone as optimistic and ambitious, as he said worrying about paying for all of the fiscal and monetary rescue measures would have to wait for another day.
“The Fed has shown a very clear willingness and ability to step in with additional support whenever it’s necessary,” said Lauren Goodwin, economist and multi-asset portfolio strategist at New York Life Investments. “They probably don’t need to do anything more at this particular juncture. But policymakers, investors and society as a whole is in a race against time.”
Powell himself stressed that his hopes for a second half of 2020 economic rebound hinge at least somewhat on whether a second wave of the coronavirus comes back. And Powell said he figures that absent a vaccine, it probably will take the better part of 2021 before the economy reaches a full recovery.
Goodwin saw Powell’s remarks as less buoyant than pragmatic, understanding of a rough road ahead as the Fed is willing to do whatever it can to smooth the path.
“We know that markets functioning, but we don’t know the companies that are going to survive and we don’t know that the companies that do survive will have workers who feel safe coming back,” she said. “Powell is trying to strike a balance between, ‘Hey, don’t panic, we’ll do whatever it takes to support the economy’ and we only have so many tools and things are pretty bad.”
All told, the Fed has been given the ability to put some $2.6 trillion to work of which it has deployed about $100 billion.