It was just a matter of when, not if. The Fed convened ahead of its March 18 meeting and preemptively announced its “bazooka” response to the ongoing COVID-19 crisis. The fed funds target range was slashed by 100 bps to the zero bound for the second time in history, including a new record low of 0.10% for the interest on excess reserves (IOER) rate. Additionally, the Fed will commence with a new $700 billion asset purchase program beginning today, including $200 billion of new Agency MBS purchases, and principal paydowns from MBS and agency debt will be redirected back into MBS. The Fed will also reduce bank reserve requirements to zero, and the discount window rate was cut 150 bps to 0.25% (and will lend out to 90 days). When answering reporter questions following the announcement, Fed Chair Jay Powell said they did not see negative rates as “appropriate policy in the US,” and will instead focus on asset purchases and forward guidance.

To be clear, the Fed’s action will not reverse the economic damage being inflicted by the COVID-19 crisis. This is meant to counter liquidity pressures and offset some of the tightening in financial conditions in recent days/weeks. There were liquidity issues that emerged last week in the two of the most liquidity markets in the world – Treasuries and Agency MBS, and this was clearly not lost on Fed leaders. This is a very fluid situation and difficult to forecast as it relates to the ultimate economic impact, and the Fed is effectively ensuring that monetary policy is not an obstacle during this process. With no dry powder remaining from a rates perspective, the Fed will rely on forward guidance and increases in asset purchases if it appears necessary.

Looking ahead, the burden lies more on the shoulders of fiscal policymakers and the healthcare complex. The federal government appears ready to support sectors of the economy most impacted (i.e., services sectors), as well as subsidizing the financial burdens of Americans related to this crisis. On a positive note, the balance sheets of banks and consumers were relatively healthy heading into this exogenous shock, which provides more of a buffer for this economic strain. That said, it’s now more a question of how long social distancing policies will be needed, particularly if it leads to even more temporary closures of businesses.

Jason Haley
Chief Investment Officer