5:20 UPDATE: FED DROPS RATES TO ZERO, ANNOUNCES $700 Billion QE and OPENS GLOBAL SWAP LINES. Since recording and posting my podcast, the Fed acted.
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-The Fed needs to act fast as this coronavirus crisis has a time limit. The Fed may announce actions prior to Wednesday’s FOMC statement. The Bank of Canada has cut 50bps. The Bank of New Zealand just cut 75 bps. The Fed will most likely cut another 50 bps. That is okay as long as QE initiatives are discussed.
-The Fed has expanded QE to $80 billion a month. I expect the Fed will have to increase this to $100-120 billion, with a possible upfront balloon.
-If the Fed pushes back on the whole QE concept on Wednesday, we need to sell everything
-There are many tools available to the Fed and US Treasury to enhance market functions.
-Enhanced purchases of government-sponsored mortgages
-Purchases of equities and corporate securities (modify Section 14 of Federal Reserve Act)
-I have been encouraged that the USDX has held up here. A strong dollar is better than a weak dollar under these circumstances
-The Trump regime can backstop its SBA initiative via the TALF program
-The problems in the mortgage market rest more with the processing logjam than with lack of investor interest in the MBS market.
-The Fed’s are consuming too much of the world’s credit availability. Thus a stepped-up QE program will alleviate most problems in the Commercial Paper, Mortgage, and Repo markets.