Yesterday, Jerome Powell and US Treasury Secretary, Steven Mnuchin, testified before the House Financial Services Committee on the policy responses to the Covid-19 pandemic.
Jerome Powell acknowledged in his prepared remarks: “While this bounceback in economic activity is welcome” that “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus. A full recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities.” He emphasised the Fed’s role to support the flow of credit within the economy noting: “The passage of the CARES Act by Congress was critical in enabling the Federal Reserve and the Treasury Department to establish many of these lending programs. We are strongly committed to using these programs, as well as our other tools, to do what we can to provide stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy.”
In terms of these initiatives, this week the Primary Market Corporate Credit Facility (PMCCF), the last of 9 emergency lending facilities established by the Fed, became operational. It follows on from the Secondary Market Corporate Credit Facility (SMCCF) which began purchasing eligible ETFs in May and corporate bonds from 16 June. Both SPVs were established with equity from the Treasury Department from the CARES Act and the combined size of the CCFs will be up to USD750bn in size. The PMCCF can purchase (from certified issuers) qualifying bonds as the sole investor in an issue or purchase a portion of syndicated loans or bonds at issue. It is designed to act as a funding backstop to support market liquidity in periods of stress.
However, liquidity conditions have already improved: IG and HY credit spreads have tightened a good deal from the March wides and equity markets have rallied strongly. As a further indicator of improved market conditions, the Fed has been able to scale back its purchases in the UST market from USD75bn a day in late March to USD80bn in month in June.
Going forward, Powell and Mnuchin pointed to scope to improve existing programs such as the Main Street Lending Program and more targeted initiatives for particular areas such as hospitality, travel and entertainment industries. Fiscal policy initiatives remain a focus for Congress: Mnuchin noted a number of important initiatives come to an end in July and an agreement on further fiscal stimulus needs to be reached.