MOODY’S: Fed adds to its tools as lender of last resort for the economy

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By Ryan Sweet – Moody’s Analytics

The Federal Reserve on Thursday rolled out additional actions in an effort to stabilise financial markets and be sure liquidity problems do not morph into insolvency issues.

The Fed announced that it will provide $2.3 trln in loans aimed at supporting businesses and households as well as state and local governments. The Fed activated the Main Street Business Lending Program that had been previously announced and authorised by the CARES Act. This facility will purchase up to $600 bln in loans to small and mid-sized businesses. Firms seeking Main Street loans must commit to reasonable efforts to maintain payrolls and retain workers.

The Fed also altered the Primary and Secondary Market Corporate Credit Facilities—the PMCCF and SMCCF—as well as the Term Asset-Backed Securities Loan Facility known as TALF. These three programmes will now support up to $850 bln in credit backed by $85 bln in credit protection provided by the Treasury. One notable change to the PMCCF is that the Fed will purchase high-yield debt.

Fed Chairman Jerome Powell on Thursday morning stressed that the U.S. central bank is focused on the lending facilities and that other policy innovations, including yield curve control and average inflation targeting, are not a priority. However, the Fed is essentially doing subtle yield curve control via the combination of its forward guidance and quantitative easing.

Powell brushed aside a question about whether QE will stoke future inflation. This was a concern when the Fed used QE during the Great Recession, and it was not then inflationary. There is no reason to expect it to be inflationary this time, either. In fact, the Fed is likely worried about disinflation rather than inflation.

In his comments, Powell took the Fed’s normal approach and did not provide advice on fiscal policy, but he did say that those people and businesses impacted by COVID-19 should be made whole.

This is important as the number of people filing for unemployment insurance benefits continues to climb rapidly. New filings totalled 6.606 million in the week ended April 4, less than our forecast for 7.1 million, but more than the consensus of 5.5 million. There was an enormous upward revision to new filings in the prior week, totalling 219,000. For perspective, this revision is roughly equivalent to what weekly initial claims were before COVID-19.

Initial claims have totalled 16.78 million over the past three weeks. Interpreting claims gets a little fuzzy now that the CARES Act has expanded the definition of who may file for benefits to include some who are not unemployed. It is important to note that these millions of jobs have not been destroyed, and fiscal and monetary policy needs to do everything to make sure the jobs are still there when we get on the other side of COVID-19. We expect it will take years to recover.

The key data next week will be initial claims for unemployment insurance benefits, retail sales, housing starts, industrial production and the Philadelphia and Empire State manufacturing surveys.