- Fed becomes “lender of last resort” to nearly everyone, sidestepping intermediaries
- Congressional leaders play hardball with rescue bill
- Stocks slide into the close
Fed becomes “lender of last resort” to nearly everyone, sidestepping intermediaries — The Fed early Monday announced a slew of new measures that make clear that the Fed will provide liquidity to every nook and cranny of the U.S. financial system that has a chance of causing a crack that could bring down the whole system. The Fed is doing everything it can think of to keep credit flowing to as many people and entities that it can to prevent the U.S. economy and financial markets from freezing up.
Congress needs to do its part to provide authorization for even more loans and fiscal stimulus programs to plug the massive hole in the U.S. economy that may approach 5-10% or more (i.e., peak-to-trough GDP decline). The slump in the economy is developing because of the quarantines that are needed to slow the pandemic to save lives and prevent the U.S. health care system from being completely overwhelmed by sick and dying coronavirus patients.
Most dramatically, the Fed on Monday said it will make purchases in the Treasury and mortgage-backed securities markets to whatever degree is necessary to provide liquidity to those markets and keep them operational. The Fed ejected its usual protocol of defining a dollar amount and time frame for making QE-type securities purchases, and instead simply said there is no limit. The market was impressed with the Fed’s new “whatever it takes” approach.
The Fed also announced a raft of other measures that will make it possible for the Fed to directly provide funding to more markets and counterparties, including (1) a Primary Market Corporate Credit Facility for new bond and loan issuance, (2) a Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds, and (3) a term Asset-Backed Securities Loan Facility to “enable the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration and certain other assets.”
The Fed also said it will expand the existing Money Market Mutual Fund Liquidity Facility and Commercial Paper Funding Facility to include a wider range of muni securities.
Recognizing the critical role of small businesses in providing jobs in America, the Fed also said that it will soon establish the “Main Street Business Lending Program.” That program will support lending to eligible small and medium-sized businesses in conjunction with the Small Business Administration (SBA).
Congressional leaders play hardball with rescue bill — Congressional leaders are playing hardball in negotiating a rescue bill with little regard for the stock market’s potential downside, except to the extent that it might get the other side to capitulate. Luckily, the Fed on Monday came in with its impressive new list of liquidity measures to prevent a big sell-off in stocks due to Congressional dithering over a rescue bill.
The positive psychology from the Fed’s new measures, however, wore off as Monday wore on with no apparent movement toward a bipartisan rescue plan and with Senators openly sniping at each other on the Senate floor. Senate Democrats have twice blocked procedural votes called by Senate Majority Leader McConnell. Senate Minority Leader Schumer called those procedural votes “irrelevant” until there is a bipartisan bill to consider. House Speaker Pelosi on Monday night previewed a $2.5 trillion House rescue bill that she says the House could pass depending on what happens in the Senate.
Senate Republicans are trying to ram their deal through the Senate without an agreement on a final bill from the Democrats. However, the real negotiations seem to be taking place between Schumer/Pelosi and Treasury Secretary Mnuchin as the representative for the White House. The Democrats seem to be calculating that if there is a deal between the Democrats and the White House, that is explicitly supported by President Trump, then the Senate will be forced to fall into line.
Meanwhile, the ranks are thinning in Congress. The House is out on recess, and Speaker Pelosi does not plan to call her members back to session until there is a deal to vote on. Two House members have the coronavirus. In the Senate, three Republican Senators are absent from floor votes because Senator Rand Paul is out with a coronavirus infection, and Senators Mitt Romney and Mike Less are in self-quarantine because of their contact with Mr. Paul. Rand Paul was in the Senate building and the Senate gym and pool as recently as Sunday.
Senator Amy Klobuchar’s husband is in the hospital with coronavirus, although she is apparently still working. Other Senators that were recently in self-quarantine due to possible exposure to people with the coronavirus included Senators Scott, Cruz, Graham, and Gardner.
One solution for the Senate’s absentee problem would be to allow Senators to start voting remotely, which it may be forced to do despite the long tradition of requiring Senators to be on the floor to vote.
Stocks slide into the close — The S&P 500 index on Monday fell to a new 3-1/4 year low and closed the day down -2.93%, adding to last week’s -15% plunge. Stocks saw weakness in the afternoon as Congress remained deadlocked on a rescue deal. The dollar index on Monday remained below last Friday’s 3-year high and closed mildly lower by -0.32% as the Fed’s unlimited QE program temporarily took the shine off the dollar. The 10-year T-note yield fell -5.9 bp to a 1-week low of 0.786% as the Fed’s easing moves supported T-note prices, and at least temporarily offset concerns about the massive supply of debt the Treasury will be selling in coming months.
