Yesterday as the media clustered around the news from the Bank of England the real news came from the US Federal Reserve which in many respects is acting as the world’s central bank. So it has two roles right now the first is for the world’s largest economy and the second is for the rest of us.For the avoidance of doubt that is the order in which it will operate if its past track record is any guide. There was something of an irony as so many US financial commentators were looking at the Bank of England. Some of you may have spotted me pointing out to the Nobel Prize winner Paul Krugman that he was spreading an economics version of fake news.
The Trigger
This was provided by the latest weekly update on the US labour market
The latest round of coronavirus-induced layoffs and furloughs soared by another 6.6 million in the first week of April, bringing total job losses in less than a month to 16.8 million.Initial jobless claims, a rough proxy for job losses, have now posted increases of 6.6 million, 6.8 million and 3.3 million in the last three weekly readings since the middle of March.
To put these mind-boggling numbers in perspective, before the March 21 surge, the highest single weekly reading ever recorded was 695,000 in 1982,” said chief economist Joshua Shapiro of MFR Inc. ( Marketwatch )
As you can see these were really bad and came with a sub-plot that there had been so many claims that the offices processing this had been struggling to keep up. Thus the real situation was likely to be even worse.
The Federal Reserve’s Response
The US central bank came out of the blocks like a 60 metres sprinter
”
The Federal Reserve on Thursday took additional actions to provide up to $2.3 trillion in loans to support the economy. This funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus.”
Apart from the rapid response there was an immediate impact from the sum quoted as this was slightly over half the size of the pre Corona Virus peak of the Fed’s balance sheet. So in modern parlance a bazooka.
There was something rather familiar in there which was a central bank “interpreting” its mandate. Let me cover that by looking at the market response via the Financial Times.
The high-yield market, often referred to as “junk”, encompasses the debt issued by lower-rated, riskier companies that are more exposed to deteriorating economic conditions stemming from the viral outbreak and the collapse in oil prices.
In response to the Fed’s move on Thursday, the biggest high-yield bond ETF — run by Blackrock which is also administering the Fed’s bond purchases — jumped by more than 7 per cent, on course for its largest one-day move since 2008.
Therè are two points to consider here which is the expansion of the role of the Fed and the way that Blackrock seems to have surpassed the Vampire Squid Goldman Sachs. As it administers a process which sees its own fund surge! Here is the view from CNBC.
As part of its announcement, the Fed expanded its corporate lending programs to take it into an entirely new area, including ETFs of companies that are rated below investment grade. It had previously announced a program to buy investment-grade corporate debt and ETFs. It also will now accept triple-A-rated commercial mortgage-backed securities and collateralized loan obligations as part of its Term Asset-Backed Securities Lending Facility, first created in the financial crisis.
The Details
Below is the report from the Fed itself and the significant factor is how often these policies need to be underwritten by the US taxpayer.
Bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
Ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility;
Increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury; and
Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.
Comment
Back in the day my boss was convinced that the US authorities were buying equities when the market fell and such thoughts became what half – jokingly became called The Plunge Protection Team. That then developed into the concept of central banks providing a Put Option for equity markets via not letting them fall.The most explicit version of that is the Bank of Japan which bought over 500 billion Yen of equities this month . Hence its nickname of The Tokyo Whale.
Now we see the US Fed heading on that road and there is one bit it is copying from Japan which is the use of Exchange Traded Funds or ETFs. I guess that is to avoid having to go to any AGMs and the like. But as to the Fed buying equities well I hope by now I have taught you all what to do with these.
Mnuchin says no talks right now about potential to have fed buy stocks
In terms of monetary policy the balance sheet is already over US $6 trillion and will go much higher. In terms of the money supply the recent growth rate of narrow money was already 13.4% at the end of March and now seems set to surge.
Happy Easter and I hope you have the same weather as London today.