For the Fed, it’s time to flip the script

A little nonsense now and then is relished by the wisest men. – Willy Wonka

As our leaders in Washington DC bicker over a fiscal response to COVID-19, mostly coming up with ideas that look to win votes (payroll tax holidays, guaranteed sick leave for everyone, tax credits for affected companies) as opposed to actually saving the economy from a credit induced depression, it looks like it is on the Fed again to do the job. To that, the question is, just what does the Fed has left in its arsenal?

On Thursday the Fed announced an unprecedented liquidity facility, $1.5 trillion in 1-month and 3-month repo operations to flood banks with liquidity as the signs of potential cash hoarding were taking place within the banking system. On Wednesday, as the COVID-19 virus escalated at hyper-speed we had at least two large private equity firms (Blackstone and Carlyle) tell the companies (that they loaded up with debt to buy) to tap all available bank credit lines. By the way, Blackstone and Carlyle own a whole lot of companies. At the same time, Wynn Macau and Hilton were also reported to be hitting their lines. However, despite these troubling signs, of the $1.5 trillion of Fed term repo funding offered this morning, only $119.5 billion was taken.

Meanwhile, along a similar vein, the markets and The President are telling the Fed to cut their policy rate essentially to zero next Wednesday. We are really not sure what that is going to do, but I guess now that expectations are solidly in place, if the Fed does not cut the policy rate 100 basis points next week every market on the planet will explode.


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