Fed Looks to Implement Rarely Used Tool as it Battles Unprecedented Economic Damage

Today’s remarks by New York Fed President John Williams were illuminating as he discussed the possibility of “yield curve control” to aid the economy. This will involve the Fed buying and selling long-term bonds in order to “set” long term rates. This has not been implemented since WW II. Other countries have attempted this strategy recently, most notably Japan in setting long-term rates at 0%. The Fed continues to search for stimulative tools as they have already dropped rates to 0% for an extended period. Meanwhile, the Fed is rolling out four new previously approved facilities this week: $600 Billion Main Street Lending Program, Primary Market Corporate Credit Facility, Municipal Liquidity Facility, and Term Asset Backed Securities Loan Facility. This will place the Fed in the center of the corporate, municipal and MBS bond markets as buyer of last resort. The Main Street Lending Facility is highly anticipated, and will allow the Fed to lend (at approximately 300 over LIBOR) to companies with employees of 15,000 or less, hoping that this access to capital can help act as a springboard back to “normality”. Secretary Mnuchin indicated last week that the Treasury expected to “take losses” on these programs, implying they are almost like grants. The issue will be whether these capitalized businesses will be able to attract customers and thrive in the the present economic environment. Will customers (corporate or individual) still spend? The Treasury is “fully prepared to take losses in certain scenarios” on these programs implying that they are almost like grants. This gets back to solvency issues and whether more government grants are in order, ie. another stimulus package. After lots of hemming and hawing about “wait and see” it seems there is some new sense of urgency to pass another bill in early June. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners