• Joel

HUGE Market Reversal as Fed Throws Kitchen Sink

Much to the market's surprise, the Fed this morning unveiled a HUGE package of support measures, including unlimited QE. 

The announcement triggered a stunning reversal in the market’s fortunes. Prior to the announcement, US equity futures had previously hit their limit down (-5%) level, on growing Covid-19 concerns about global economic shutdown and a failure of the US Congress to agree on a stimulus package.  

After the announcement, S&P 500 futures spiked by nearly 200 points to just under $2400 from pre-announcement levels in the low $2200. However, the lion’s share of those gains have since been given away. 

The shift to unlimited QE was a wise move for the Fed, given they had already been rapidly burning through the $700bln in QE announced just last week ($272bln of its $500bln had already been spent on treasuries and $68bln of its $200bln had already been spent on Mortgage-Backed Securities by Friday). 

In its statement, the Fed said that it “will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.”

The Fed added that this week it would be purchasing $75bln in treasuries and $50bln in mortgage backed securities each day. Remember back in QE3 when this was the Fed’s monthly purchase amount? Such is the scale of these unprecedented measures. 

The Fed also announced the creation of two new lending facilities to large companies: the first called the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance, and the second called the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for existing corporate bonds. 

The Fed also announced a return of its crisis-era Term Asset-Backed Securities Loan Facility (TALF) to support the flow of credit to consumers and businesses and announced that it would be expanding the money market mutual fund liquidity facility to include wider range of municipal bonds. 

Finally, the Fed said that it expects to soon launch a Main Street Business Lending Program to support small- and medium-sized businesses.

"This is an all-out effort to ensure that the business sector can continue to exist even as economic activity temporarily collapses," commented Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The Fed is now effectively the direct lender of last resort to the real economy, not just the financial system."

“The pressure is now on Congress to get its act together and provide the support that the Fed cannot do – helping the vulnerable people who face the biggest health and economic consequences of the lockdowns” notes ING. However, the bank points out that there is a risk that this “wall of support” from the Fed may give Congress a false sense of security, or that it has more time and the pressure to deliver a package is reduced. 

ING warns that such complacency needs to be avoided; “with initial jobless claims set to surge by in excess of 2 million this week alone – it would be higher, but jammed telephone lines and crashed website mean not everyone can register, and certainly it will be much higher in coming weeks  – this all means that there is a large and rapidly growing proportion of the population who were living paycheque to paycheque facing immense strain and hardship.”


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