Fed Keeps Pedal to the Metal

The Federal Open Market Committee (FOMC) is scheduled to formally meet on April 28 and 29. This is technically the third official meeting this year, although committee members have already acted aggressively to support credit markets and lending between meetings. The last scheduled FOMC meeting was moved up from March 17-18 to March 15, a Sunday, to attempt to derail the rapid deterioration in credit markets that was underway.

Look for the Fed to dramatically downgrade its assessment of economic conditions in the statement following this meeting. Schools were closed starting March 16 and states began to shelter in place on March 19; California was the first to move with a statewide order. The result has been an unprecedented surge in layoffs - at least 26 million according to initial unemployment insurance claims - and cessation in economic activity. Retail sales, home sales and industrial production all fell at an unprecedented pace in March. The preliminary data for April looks even worse.

The Fed is expected to highlight concerns about the low level of inflation. The drop in oil prices has been among the most stunning of declines. While exacerbated by a price war between Saudi Arabia and Russia, it is not the only sector of the economy suffering from the downdraft in demand.

The Federal Reserve has announced that it is working to expand purchases of loans extended through the small business Payroll Protection Program (PPP) to match the additional $310 billion that Congress approved for those loans last week. The Fed is mulling expanding its Main Street loan program, which is targeted at businesses that are too big to qualify for small business loans but too small to access credit via the corporate bond market. Expanded eligibility would allow hospitals and universities to participate. This could be announced at the conclusion of the FOMC meeting this week.

The Fed has pledged to buy municipal bonds up to two years in duration for all states, the District of Columbia, counties with a population of more than two million and cities of more than a million. The bonds for states can be used to fund smaller cities and counties but Congress has asked that the Fed expand the program to explicitly include less urban areas. This decision could also come as soon as this week.

The Fed is expected to further underscore that there is no arbitrary end date to its current programs. The goal is to reassure financial markets and the public that the Fed will not pull the plug on support too early. Fed Chairman Jay Powell is one of the few people in D.C. to clearly articulate the unique nature of this crisis: “...people are undertaking these sacrifices for the common good. We need to make them whole, to the extent we have the ability to make them whole, we should be doing that as a society. They didn’t cause this.”

Finally, Powell and his colleagues will offer reassurance that they are prepared to do more if needed. Many (myself included) underestimated the Fed’s ability to literally print an entire new arsenal of tools to combat the crisis. They made a calculated bet that any challenge to the Fed’s independence after the crisis was worth the risk, given the alternative - a deep and prolonged global depression. What are the limits? The Fed can only lend, it cannot spend; that is the job of Congress. We are lagging other developed countries in our aid efforts, despite having fewer safety nets. The one thing this crisis has given us is foresight. We can see that we will need more from Congress in aid or much of what we have done will be lost. The Fed can’t right that wrong.

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