The U.S. Federal Reserve said on Monday (March 23) that it would support a large range of credit for not only households, but big employers and small businesses alike, to try and push back the “tremendous hardship” that’s been caused by the coronavirus pandemic, according to a report by Reuters.
In a statement, the Fed said that it had to try and do this because “it has become clear that our economy will face severe disruptions.”
David Joy, chief market strategist with Ameriprise in Boston, said while he applauds the Fed for trying, it simply won’t be enough.
“What the Fed is doing is probably a necessary but, by itself, insufficient precondition to addressing the impact of the coronavirus,” Joy said. “The Fed wants to unclog the credit spigot and eliminate illiquidity as a contributing factor to the coming slowdown. Part of that is simply generating confidence that money will be available. But that does not and cannot address the healthcare aspect of this, nor can it address the economic impact of social distancing and stay-at-home directives. Congress also needs to act and buy time for the crisis to stabilize and the economy to restart.”
Michael Skordeles, U.S. macro strategist at Truist/Suntrust Advisory Services in Atlanta, explained why stocks were going lower.
“There are some cross-currents offsetting or overwhelming” the Fed, Skordeles said. “A lot of companies are cutting estimates this morning. The epidemic is getting worse. The recession talk is getting worse, including the St. Louis Fed president (on Sunday) saying unemployment could be 30%. There’s disappointment that Congress didn’t get something done on Sunday. You can pick out of a hat 15 different reasons why people are selling. We had a crummy last week, so there are also people saying, ‘Oh, there’s some strength. I’m going to sell into strength.’”
He reiterated that there’s a reason for the consequences: this has never happened before.
“We are in unprecedented, uncharted waters. There’s so many dislocations with corporate bonds and muni bonds, and that impacts a lot of companies and state governments, county governments and municipal governments. If you don’t have the right credit, and you’re dependent on the bond market to provide that, you’re going to have to lay people off. In the case of a county or city that’s dependent on sales tax, well, you just shut everything down … Unlike Uncle Sam, they can’t deficit spend,” he said.
Evercore, ISI Fixed Income Strategist Stan Shipley said that whole the Fed’s balance sheet will go up, the system as a whole will be fine.
“The Fed made it very clear that the financial system is not going to have a freeze-up like in 2007 and 2008. They’re going to buy almost every debt instrument asset out there that will prevent this. As a consequence, their balance sheet in one week is going to rise the same or more than we witnessed in QE 2. They will have a big balance sheet. Get ready for it. But the financial system is not going to fail,” he said. “Ultimately you still have the risk that as you shut down 40% of the economy and more going down everyday, this cannot go on forever. But this provides several months of room for us to win the battle against the virus.”