The Federal Reserve on Monday announced a massive second wave of initiatives to support a shuttered U.S. economy, including buying an unlimited amount of bonds to keep borrowing costs low and setting up programs to ensure credit flows to corporations and state and local governments.
Intervention into the corporate bond market is an unprecedented step for the Fed, though central banks elsewhere in recent years have undertaken similar measures to support liquidity conditions for companies.
The Fed's new credit facilities carry limits on paying dividends and making stock buybacks for firms that defer interest payments, but have no explicit restrictions preventing beneficiaries from laying off workers.
The sweeping moves underscore the scale and scope of the disruptions caused by the coronavirus outbreak, as large portions of the economy have shut down almost overnight in a bid to contain it.
"Wow, just wow," George Rusnak, head of investment management at Wells Fargo Private Bank, said on Bloomberg Television. "Hopefully you'll come out of this with some fiscal stimulus as well, and you'll be set with good growth opportunities in the long run."
But in a sign of just how unnerved investors are by the pandemic, the Fed's moves failed to spark anything beyond a brief rally in stocks and corporate bonds Monday. Stocks fell around 1.5% after trading opened in New York. Yields on 10-year U.S. Treasuries initially sank below 0.69% as investors digested the news before pushing back to around 0.73%.
The Fed will buy Treasuries and agency mortgage-backed securities "in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy," and will also buy agency commercial mortgage-backed securities, according to a statement.
The Fed had said a week ago it would buy at least $500 billion of Treasuries and $200 billion of agency MBS.Under the new programs the Fed will take on a slew of efforts, many aimed at directly aiding employers and households, as well as cities and states.
The Fed also said it will support "the flow of credit to employers, consumers and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing." It will be backed by $30 billion from the Treasury's Exchange Stabilization Fund.
"This is a great step forward," said Julia Coronado the president of MacroPolicy Perspectives. "Getting to the corporate bond market was critical. A lot of people needed to be clear the QE was unconstrained."
The Fed also said it "expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small and medium-sized businesses, complementing efforts" by the Small Business Administration.
Two more programs were created to support large employers -- a Primary Market Corporate Credit Facility for new bond and loan issuance, and a Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds. A borrower can opt to defer interest payments for six months though if they do, they may not pay dividends or make stock buybacks during the period it is not paying interest. Purchases will include exchange-traded funds that invest in corporate debt.
Yet another program, a Term Asset-Backed Securities Loan Facility, will "enable the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and certain other assets."
The central bank also said it would expand the existing Money Market Mutual Fund Liquidity Facility to include a wider range of securities, including municipal variable-rate demand notes, a step aimed at assisting states and cities.
Finally, the Fed said it would expand the existing Commercial Paper Funding Facility to also include high-quality municipal debt, another move to help cash-strapped states and cities.
"The Depression was about the Fed moving too slowly," said Neil Dutta, head of economics at Renaissance Macro Research in New York. "We are seeing a lot of things today. But, a slow moving Fed hasn't been one of them. That's encouraging."