6/15/2020
As was the case during the financial crisis 12 years ago, the Fed is essentially out of ammunition at the short end of the yield curve (unless rates go negative, which continues to be seen as unlikely). There remain robust tools, such as buying of debt to push rates lower across the broader yield curve, as well as specific targeting of certain bond maturities to cap rates at certain levels (yield curve control). The Fed has already been providing liquidity to markets by operating lending facilities, and may continue to facilitate the purchase of non-conventional debt, such as investment-grade corporates and ‘fallen angel’ high yield. However, it isn’t viewed as likely to purchase equities outright, as has been done in some countries. But never say never, we suppose.
They appear to feel one of their strongest weapons is ‘forward guidance’—which is the communication to the marketplace that they intend to keep policy accommodative for as long as necessary for the economy to recover from Covid-related damage. This may not seem like much, but it actually provides a framework that financial markets certainly respond positively to and businesses can plan around to some extent.
Of course, the ongoing risk is that the Fed does too much, which funnels the influx of cash into financial assets (or real assets, like last time)—creating pricing bubbles. Former Fed chair Alan Greenspan has been increasingly criticized for policies that led to the creation of the later housing bubble. Current chair Powell has been asked about this risk many times, so no doubt he’s aware of it. Whether promoting financial market stability falls under the Fed’s mandates continues to be debated.