Drastic Fed interventions are unprecedented, but are they enough?

“Investors want to know the Fed stands ready to do what it takes, even if what it takes is being redefined,” said one former adviser to the Federal Reserve.
Image: Meric Greenbaum
Specialist Meric Greenbaum works with traders on the floor of the New York Stock Exchange.Richard Drew / AP

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By Martha C. White

The unprecedented steps taken by the Federal Reserve and the coordinated action of central banks around the world in response to the coronavirus pandemic will hopefully be enough to shore up the financial system, but market observers are still holding their breath.

Eager to prevent a public health crisis from spiraling into a financial crisis as well, the Fed slashed its benchmark interest rate to between 0 and 0.25 percent, and promised $700 billion in quantitative easing, on top of the $1.5 trillion it pledged in other types of support just last week. Analysts say, though, that Wall Street badly needs to hear how lawmakers intend to help struggling Main Street businesses, and by extension, millions of American families.

“There are still quite a few households that are on the brink, living paycheck to paycheck, and don’t have the financial cushion to see them through,” said Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence and a former Federal Reserve adviser. “The need for coordinated fiscal and monetary policy support needs to happen yesterday.”

The new round of quantitative easing announced over the weekend, for which the Fed has pledged to buy $200 billion in mortgage-backed securities and $500 billion in Treasurys, is important to promote liquidity in the bond market, which is the backbone of consumer and business lending, said Greg McBride, chief financial analyst at Bankrate.com.

“What they’ve done that is most significant are the steps to keep credit markets functioning. That’s critically important, so that a health crisis doesn’t morph into a financial crisis,” he said. “What really brought us to the brink in 2008 was when financial markets seized up.”

Rock-bottom interest rates will encourage borrowing and help the economy rebound after the crisis has passed. “Those low rates do help for when we’ve pressed the ‘resume play’ button on the economy weeks or months from now,” McBride said.

Even these monumental interventions can’t provide an immediate infusion of cash to American families and the mom-and-pop businesses that are bracing for a sharp drop in income.

But what even these monumental interventions can’t do is provide an immediate infusion of cash to American families and the mom-and-pop businesses that are bracing for a sharp drop in income.

Analysts said fiscal policy must fill in the gap to keep American households solvent — and time is of the essence. Although President Donald Trump signed an emergency spending bill allocating $8.3 billion to public health efforts to fight the spread and impact of the virus, and the House of Representatives passed a bill that the Senate is expected to take up this week, some say more and more rapid action is needed.

“They've done most of what they can do when it comes to the conventional realm,” DiMartino Booth said.

“The markets are nervous,” she said, adding that the Fed might have sent a signal that it is running out of options by canceling its March meeting scheduled for this week. “Investors don’t want to think that the Fed thinks it has done enough,” she said. “They want to know the Fed stands ready to do what it takes, even if what it takes is being redefined.”

Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics, said that “whatever” should be more direct intervention.

“The Fed's major focus is on funding the markets in the hopes that the market will then support households and businesses. But my belief is the Fed can’t do the two-step process. It has to be direct. This is too much of a crisis to be deferential to market mechanisms,” she said.

The Fed’s backstop as a lender of last resort for banking institutions is intended to support their consumer and commercial lending activities during times of financial stress, but Petrou argued that won’t be enough this time. She advocated for a direct program of short-term, low-cost loans operated by the central bank itself, rather than through commercial bank intermediaries.

“Individual institutions on their own cannot provide relief in the scale, scope and as quickly as needed. They’ll never be able to do enough,” she said. “The Fed isn’t using the power it still has as effectively as it must. Its focus is saving markets, and this isn't a markets problem. It's an American problem.”