What Fed Watchers Make of 'QE Infinity'

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. 

Legal Ledge

“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.” 

‘The Closest They Can Get’

Looking at the iShares Investment Grade Corporate Bond Fund (LQD), as it traded up 7% Monday, “What the Fed does by coming in and buying those [bonds], which the market sees as being as being junkier than what the credit-rating agencies say, is that it alleviates some pressure on high yield and some of the pressure on credit,” explained DeMartino Booth.

“This is the closest they can get without crossing that rubicon,” she added.

‘New Reality’

But Bianco remains quite pessimistic after the Fed’s latest moves. “We are not going back,” he wrote in the blog post. “We are headed to a new reality. Markets understand this and they are rapidly re-pricing to a post-virus world at historic speed. This is causing all kinds of problems as the markets move on from the old pre-virus reality.”

As the Fed is trying to stop this “re-pricing,” Bianco asked: “Will these new measures work? Can the Fed stop the entire financial world from repricing to what it perceives as fair value?”

The analyst acknowledged that it’s “difficult, if not impossible, to know where the market sees fair value at this point.” He added that the new Fed facilities “will only work if the market is close to a perceived fair-value level. If risk markets still see lower prices in a post-virus reality, then they will continue to head lower.”

It’s all part of a new era, according to Bianco: “The world has changed. If the Fed is trying to stop the market from reflecting this, it will not work. If the markets are close to what it deems fair value on risk markets, perhaps the Fed’s announcement this morning will prove helpful.”