Since March, the Federal Reserve has launched a series of unprecedented measures to ease the impact of the epidemic on financial markets and the U.S. economy. The Feds measures include cutting interest rates to near zero, unlimited QE, emergency tools set up to support credit markets, expanding liquidity swap lines with foreign central banks, and plans to provide loans directly to US companies.
Powell said the Feds goal was to get involved in places where credit was supposed to be provided but not provided..
In response to a question about whether the Fed has enough firepower, Powell said: in terms of loans, we will not run out of ammunition, which is not going to happen. We still have policy space in other areas to support the economy.
As the U.S. economy stalled to stop the spread of the epidemic, Powell stressed that the U.S. may be in recession, but this is not a normal recession, and there is no fundamental problem in the U.S. economy.
Its a unique situation, Powell said. People are asked to shut down their businesses and stay at home and not work. At some point, we will control the spread of the virus, and confidence will be restored.
Regarding the time of US economic recovery, Powell believes that economic activity may fall sharply in the second quarter, once the health emergency is over, there will be a good rebound.
For decades, the open communication of fed chairmen has been carefully designed because even subtle signals can have an impact on investors.
Before Powell, the chairman of the Federal Reserve was interviewed on television 11 years ago. In March 2009, Ben Bernanke, chairman of the Federal Reserve during the financial crisis, was interviewed on CBSs 60 minutes program. In 1987, Alan Greenspan, the former chairman of the Federal Reserve, appeared on ABCs this week with David Brinkley program, but then the stock market fell.
Powell said the message of the TV interview was that this is a very special situation, not a typical recession, and that people are investing in public health when they stop economic activity. The Fed is now trying to support you, and when the recovery really comes, our policies will be very important to make it as strong as possible.
Shortly after Powells speech, the dollar index fell, just a step below the 100 mark. Subsequently, the US dollar index rebounded to around 100.28 at 20:50 Beijing time.
The euro rose against the dollar, up about 0.8%.
What other bullets does the Fed have? Or will continue to use tools during the 2008 crisis
The Federal Reserve has reactivated some of the instruments used during the 2008 financial crisis, such as the term asset-backed securities loan facility (TALF), which can support the issuance of loan backed asset-backed securities to businesses and consumers affected by the crisis. During the 2008 financial crisis, this instrument successfully extended credit to many families and businesses. The unconventional liquidity instruments launched in 2008 include mmlf, PDCF and CPFF.
If the epidemic develops further, does the Federal Reserve have ammunition as Powell said? In terms of monetary policy instruments, the Federal Reserve may continue to use unconventional instruments during the 2008 financial crisis. Earlier, two former Fed chairmen, Ben Bernanke and Janet Yellen, suggested the use of a term auction facility, also created during the financial crisis. Although the Federal Reserve has increased the attractiveness of the discount window, banks have always been reluctant to use the discount window as a source of funds. They often worry that the market will infer that if a bank has to use the discount window, its financial situation must be very poor. During the financial crisis, the Federal Reserve used TAF to supplement the discount window and the regular auction mechanism to auction funds to banks, which solved this problem. Banks are more willing to use TAF, so TAF is more successful in providing them with the funds they need to borrow.
In addition, the Federal Reserve can try to provide low-cost financing tools for banks, such as the financing for loan program (FLS) provided by the Bank of England.
There are also some market views that, referring to the Bank of Japan, the Federal Reserve may directly purchase other assets such as ETFs in the future and continue to increase asset purchase.
As a matter of fact, the Federal Reserve has such an arrangement in a series of measures announced on March 23, namely, the secondary market credit facility (smccf), through the establishment of SPV to directly purchase investment grade US corporate bonds and qualified exchange traded funds (ETFs) in the secondary market. According to the Federal Savings law, the Federal Reserve has no right to directly purchase corporate bonds. If the Federal Reserve wants to directly purchase investment grade bonds issued by companies, it will take a long time for Congress to modify the bill. This operation of the Federal Reserve, in fact, is to bypass the restrictions of Congress and put liquidity into the credit bond market, which can relieve the pressure of the credit market under the high leverage of enterprises. At the same time, the Federal Reserve began to untie commercial banks and gradually reduce the restrictions on bank capital and liquidity. Societe Generale Securities believes that if the U.S. financial and economic turmoil continues substantially in the future, after removing the legal obstacles, or even not excluding the further relaxation of Basel III or Walker rules. Source: responsible editor of Beijing News: Chen Hequn, nb12679
As a matter of fact, the Federal Reserve has such an arrangement in a series of measures announced on March 23, namely, the secondary market credit facility (smccf), through the establishment of SPV to directly purchase investment grade US corporate bonds and qualified exchange traded funds (ETFs) in the secondary market.
At the same time, the Federal Reserve began to untie commercial banks and gradually reduce the restrictions on bank capital and liquidity. Societe Generale Securities believes that if the U.S. financial and economic turmoil continues substantially in the future, after removing the legal obstacles, or even not excluding the further relaxation of Basel III or Walker rules.