Fed brings out heavy artillery against crisis

The Federal Reserve unveiled a new, more aggressive set of measures to stimulate the economy amid the coronavirus crisis.

Brian Cheung reported the news for Yahoo News:

The Federal Reserve called a third emergency meeting to combat the economic impact of the novel coronavirus and unveiled a number of new and “extensive” measures on Monday that would expand the Fed’s efforts to calm corporate debt markets. The Fed also said a direct lending program to Main Street businesses will be announced soon.

With turmoil continuing in corporate financing markets, the Fed expanded the scope of its asset purchases under its quantitative easing program and announced four new measures to grease the commercial paper, corporate bond, and even ETF markets.

The Fed also committed to the “establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses,” similar to programs from the Small Business Administration.

The Fed estimates the impact of its measures to provide about $300 billion in new financing available to businesses.

“While great uncertainty remains, it has become clear that our economy will face severe disruptions,” The Fed said in a statement Monday morning. “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

Bob Pisani wrote for CNBC:

Under a program called the Secondary Market Corporate Credit Facility, the Federal Reserve will be able to purchase corporate bonds, not just Treasuries.  That alone is big news, but this program also allows for the purchase of ETFs that track the U.S. investment grade corporate bond market.

That means buying corporate bond ETFs like iShares Investment Grade Corporate Bond ETF or Vanguard Long-Term Corporate Bond ETF.  Both were up about 7% today.

The Fed made a point that it’s buying spree would be only in investment grade corporate bonds, not high yield.  Not surprisingly, high yield ETFs like iShares High Yield Corporate ETF were down 1.6%

The buying power is not unlimited — the Fed cannot own more than 20% of any one ETF, or 10% of individual corporate bonds.

While this is new for the United States, it is not unprecedented.  Japan has been buying ETFs — both corporate investment grade and equity ETFs — for several years.  The government has been so aggressive, it’s been estimated it owns about 80% of the entire ETF market there, according to etf.com

Howard Schneider and Ann Saphir from Reuters noted:

Nearly a third of the U.S. population has been urged to stay indoors as governors from California to New York mandate “social distancing” and the shutdown of non-essential businesses to slow the person-to-person spread of the virus.

With customers disappearing rapidly, businesses starved of cash may be able to tap into the Fed’s “lifeline” to stay afloat while the shutdowns continue, said University of Oregon economics professor Tim Duy.

“The Fed is still working to maintain the flow of credit because they know what happened during the Depression (when) too many firms went under,” Duy said. “The more damage that happens, the harder it is going to be to restart the economy.”

Still, he said, without massive fiscal aid such efforts won’t be enough to stem the tide of what economists polled by Reuters estimate could be a million jobless claims logged across the nation inside of a week, with more to come.