What’s new

As I noted in an earlier blog post (Fed to the Rescue: Providing Liquidity to Corporate Bond Market), the Fed’s objective with recent facilities is to support company borrowing and functioning. With a large-scale shutdown of activity and the resulting loss of income, businesses and households are now grappling with a lack of cash relative to their obligations. This has contributed to distressed selling in attempts to raise cash.

What’s next?

I expect the Fed to take further extraordinary measures, as it did in 2007-2009.

The Fed signaled it is planning a lending measure to help small businesses: "...the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small- and medium-sized businesses, complementing efforts by the SBA." The Fed may have waited to see what would come out of Congress. The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, and that Act boosted the Treasury's Exchange Stabilization Fund by a huge $425 billion. That extra funding will allow the Treasury to provide equity for Fed special facilities that should offer far more lending.

The shock of the pandemic hit the real economy, and the financial system is one of the victims. The Fed’s special facilities will use the financial system to help prevent a crash in the real economy from a lack of liquidity.

Most of any future measures would likely involve section 13(3) authority and would need the approval of the Treasury Secretary.

I continue to believe the Fed will revive its Term Auction Facility (TAF) originally created in 2007. Banks bid for funds from the Fed anonymously—accessing liquidity without stigma. I am surprised the Fed hasn't revived this facility yet.

TALF Details:1

The TALF will serve as a funding backstop for ABS issued by eligible issuers.

The Federal Reserve Bank of New York will create a Special Purpose Vehicle (SPV) on a recourse basis and lend to the SPV the funds that it needs.

The New York Fed will be secured by all the assets of the SPV.