The Federal Reserve announced a series of huge moves early Monday in response to the continuing fallout tied to the coronavirus pandemic. This includes unlimited asset purchases and its first-ever entry into corporate bonds via the purchase of investment-grade securities, including exchange-traded funds.
The news drew immediate responses from Fed watchers like Jim Bianco, president of Bianco Research, and Danielle DiMartino Booth of Quill Intelligence.
“It is difficult to find a superlative to describe what the Fed announced this morning. At first blush, it looks like they are nationalizing financial markets, except for equities and high yield. This better work in stabilizing financial markets!” Bianco said in a blog post.
The Fed is … doing what it did for quite a bit of time during the financial crisis and that is making up for what Congress is not delivering,” said DiMartino Booth in an broadcast interview with TD Ameritrade Monday morning.
“It’s clear that they have done literally all that they possibly can without opening the Federal Reserve Act into the actions they’ve taken this morning,” she explained. “They have done … exactly and everything up to the ledge of what they can legally do.”
When asked what this means for the Fed’s next steps and its remaining ammunition, the former advisor to the Federal Reserve Bank of Dallas said: “In terms of ammo, they have made it ‘QE Infinity,’ because they’ve made it completely open-ended in terms of the amount. They’re saying, we can take the balance sheet from $4.5 trillion to $10 trillion if we want to. We can take it up to 50% of U.S. GDP.”
In other words, the Fed has rapidly expanded what it can buy in the open market and wants to “make sure it can get liquidity everywhere that it legally can,” she said.
What About Main Street?
As for why equities are down Monday (by about 3%), “there is a little less color on the Main Street program, and that program is certainly not big enough to address all of the small-business stress that is going to be resulting from this effective national lockdown,” DiMartino Booth said.
“It is clear that Treasury Secretary Steven Mnuchin is working very closely with the Fed to figure out where the legal line is,” she added. “As far as we know, equities and high-yield bonds are a bridge too far.”