They didn’t wait.
Rather than risk being blamed for another two days of market turmoil ahead of the March FOMC decision, Jerome Powell delivered his own “whatever it takes” moment on Sunday evening.
‘Mark it zero’
In an extraordinary announcement that will echo for years to come, the Fed cut rates to zero and rolled out a raft of measures aimed at stabilizing not just US markets, but the global financial system more generally.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States”, the Fed said, in the statement. “Global financial conditions have also been significantly affected”.
In addition to the 100bps rate cut – which still looks astoundingly large, even as the market was pricing it in – the Fed enhanced its forward guidance.
“The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”, the statement reads.
That, folks, is state-dependent forward guidance. And it will be welcomed by the market over the longer-term irrespective of whatever knee-jerk reaction plays out this week.
And there’s more – much more.
In a move long-championed by market participants with their proverbial “ears to the street”, the Fed expanded its swap lines.
Specifically, the Bank of Canada, the Bank of England, the Bank of Japan, the ECB, the Fed, and the Swiss National Bank unveiled a coordinated move to enhance the standing USD liquidity swap arrangements. Here are the details:
These central banks have agreed to lower the pricing on the standing US dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the US dollar overnight index swap (OIS) rate plus 25 basis points. To increase the swap lines’ effectiveness in providing term liquidity, the foreign central banks with regular US dollar liquidity operations have also agreed to begin offering US dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These changes will take effect with the next scheduled operations during the week of March 16. The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of US dollar funding markets.
As Zoltan Pozsar outlined weeks ago, the Fed likely needed to do more in terms of recognizing its role as the only USD “surplus” agent in a global economy where “deficit agents” are set to proliferate over the coming months.
A funding squeeze, a broken Treasury market and $700 billion in new QE
The Fed has, of course, taken action over the past several weeks prior to Sunday’s dramatic move, delivering an emergency 50bps rate cut (at the time the first inter-meeting cut since the crisis), upsizing existing repo operations, adding new super-sized liquidity facilities and expanding asset purchases beyond T-Bills, with buying now taking place across the curve.
Last week’s measures were aimed primarily at addressing two things. First, a funding crunch was in the offing, and it was manifesting in a variety of ways. It is never a good sign when ostensible arcana like FRA/OIS grab headlines.
The New York Fed on Sunday announced a new $700 billion QE program in order to help alleviate stress and iron out what were becoming some very pernicious “wrinkles” (if you will) in the rates market. To wit, from the official announcement:
Effective March 16, 2020, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) to increase over coming months the System Open Market Account (SOMA) holdings of Treasury securities and agency mortgage-backed securities (MBS) by at least $500 billion and at least $200 billion, respectively. The FOMC instructed the Desk to conduct these purchases at a pace appropriate to support the smooth functioning of markets for Treasury securities and agency MBS. The FOMC also directed the Desk to continue rolling over at auction all principal payments from Treasury securities holdings and to reinvest all principal payments from agency debt and agency MBS holdings in agency MBS. These plans replace the Desk’s previously communicated plans for reserve management and reinvestment purchases. In addition, the FOMC directed the Desk to continue conducting term and overnight repurchase (repo) agreement operations to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets.
Last week was one of the wildest stretches ever witnessed in the US bond market. The weekly range in the long-bond was 109bp. Recall that last Monday, 30-year yields dropped by 59bps at one juncture. It was the largest intraday decline in history and it was made all the more astonishing by both the low starting point and the fact that the fourth-largest intraday decline came during the previous session (i.e., two Fridays ago).
Disconnects between cash versus futures and myriad dislocations showed up on Tuesday, Wednesday and Thursday, setting off a near incessant stream of chatter about basis widening and what were almost surely all manner of RV blowups.
“20bps+ swings [are] now becoming standard, particularly within the off-the-run space which are trading miles wide due to balance sheet dynamics, with no more dealer capacity and RV guys unwinding into clear stop-out trades,” Nomura’s Charlie McElligott wrote Thursday.
Rates volatility surged.
That’s one of the reasons the Fed stepped in last Thursday with a “bazooka,” in the form of massive new repos and an announcement that the $60 billion/month in purchases aimed at restoring excess reserves would no longer be confined to T-Bills. Friday found the Fed buying across the curve.
As of Sunday, the issues in the Treasury market will be mitigated further by $700 billion in new QE.
Repo operations will remain in place as scheduled, the Fed said. That means at least $175 billion in overnight repo each day, at least $45 billion in two-week term repo twice per week, and $500 billion in one-month term repo and $500 billion in three-month term repo each week.
Also on Sunday evening, the Fed announced a raft of measures aimed at supporting the flow of credit to the US economy.
First, they encouraged use of the discount window, lowering the primary credit rate by 150 basis points to 0.25%. That’s effective tomorrow and it reflects the 100 basis point rate cut and “a 50 basis point narrowing in the primary credit rate relative to the top of the target range”.
Second, the Fed says depository institutions are “encouraged” to tap intraday credit from reserve banks, on both a collateralized and uncollateralized basis, “to support the provision of liquidity to households and businesses and the general smooth functioning of payment systems”.
Third, the Fed is prodding banks to “use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus”.
In other words, the Fed will relax its approach to capital and liquidity and will be inclined to look favorably upon banks that extend credit during the public health crisis.
After all, that’s what the buffers are for, the Fed chided. “These capital and liquidity buffers are designed to support the economy in adverse situations and allow banks to continue to serve households and businesses”, a separate statement (one of at least three released on Sunday evening in the US) reads. “The Federal Reserve supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner”.
Fourth, the Fed said the Board has reduced reserve requirement ratios to zero percent effective on March 26, in order to “eliminate reserve requirements for thousands of depository institutions and will help to support lending to households and businesses”.
Again, this is a “whatever it takes” moment for Jerome Powell.
If the market isn’t impressed by this, then it’s not clear what else the Fed can do. This checks nearly every, single box, although it comes with the usual caveat that the Fed cannot cure a virus or force people to leave their homes or otherwise mitigate mandatory containment efforts.
But, as Powell himself put it during the October 23—24, 2012, FOMC meeting, “It will never be enough for the market”.
The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12â€‘month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.
The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.
In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and–in coordination with other central banks–the U.S. dollar liquidity swap line arrangements. More information can be found on the Federal Reserve Board’s website.