They won't quit. They just won't quit

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      By Eric Stein, CFACo-Director of Global Income, Eaton Vance Management

      Boston - As I told a colleague several weeks ago, the biggest sign that economic conditions are getting serious is when the Federal Reserve (Fed) starts making policy announcements on a Sunday night.

      That prediction is based on my time working on the New York Fed Open Markets Desk from 2007 and 2008. During one particular weekend, I recall being asked by a senior policy maker about the time the New Zealand stock market opened because we had to announce a program late on Sunday and just before the markets opened on Monday morning in New Zealand, Australia and Asia.

      This past week, it happened again.

      On Sunday, March 15 at 5:00pm, the Fed cut rates to essentially zero, lowered the pricing on the standing US dollar liquidity swap arrangements by 25 basis points and also announced a new program of quantitative easing.

      In the week following, we saw a significant flurry of additional activity announced almost on a daily basis. For example, the Fed:

      • Re-opened primary dealer credit facility (PDCF) to provide short-term loans to banks and broker/dealers.
      • Opened up the commercial paper funding facility (CPFF) under 13(3) of the Federal Reserve Act to enable it to support the real economy, rather than simply the financial sector.
      • Created a money market lending facility (MMLF) to help ease the flow of credit and meet demand for money market redemptions.

      And the news kept coming at a rapid pace. The central bank swap was revised two times during the week, the quantitative easing purchase program was revised multiple times and the money market facility was revised again on Friday to include municipal bonds.

      Then on Monday, March 23, the Fed announced a series of entirely new programs specifically designed to limit the losses to jobs and incomes and to promote a swift recovery to the current crisis. These programs include:

      • Purchasing Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning
      • Providing up to $300 billion in new financing to support the flow of credit to employers, consumers, and businesses.
      • Establishing two facilities to support credit to large employers - the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
      • Establishing of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA).
      • Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and certificates of deposit.
      • Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.

      Oftentimes, as I was discussing a certain Fed intervention with colleagues, it would announce some other program, most of which were dusted off from the 2007 to 2008 era. As I wrote this update late on Sunday evening, the Fed announced the sweeping new programs highlighted above at 8:00am the following day. My big takeaway from the Fed's response thus far, which is consistent with the Fed's approach to the Global Financial Crisis, is that it is not going to stop until it succeeds at getting the markets to function better.

      Many colleagues have asked me what the Fed can actually do to counter this global pandemic we are experiencing. After all, how much does lowering rates really help, given that we are all being required to hunker down in this new social-distancing world? My answer is in line with my overall philosophy about how the Fed can be effective during periods such as this.

      In my view, the Fed has two main goals:

      1. Market functioning. The Fed needs to get financial markets functioning better. That means better liquidity in the Treasury market, better liquidity in the Treasury repo market (repurchase agreements), and less pressure in the dollar funding market. That's their focus right now as these markets are not only very important in their own right, but they are the backbone for many other markets globally.
      2. Providing short-term credit to the broader economy. By doing so, it will help us get through the next couple of months, at least until the economy sees the light of day and people start going out and contributing to normal economic activity.

      The current crisis is, at its core, a health policy problem resulting from the pandemic. And, it's going to be health-policy that leads us to "flatten the curve" and hopefully diminish the projected death rates and help us to resume normalcy.

      However, the crisis can also benefit from good fiscal policy, by and large, to help drive the economy forward, whether it's helping businesses, municipalities and workers. In my view, monetary policy plays a key role in ensuring the markets are functioning and in providing working capital credit to the broader economy.

      I think the Fed will continue to enact new programs whether they are providing support to the corporate credit and municipal bond markets, as well as dust off old programs that got us through previous times of crisis. If a particular program doesn't work, the Fed will modify or introduce a new one.

      Bottom line: No one should doubt the Fed's resolve to do whatever it can to see us through this unprecedented period. It has truly been the nation's first responder from the financial market perspective and my belief is that we will see much more in the weeks and months to come.