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The Federal Reserve at the Forefront

May 1, 2020 | Commentary

  • As the COVID-19 virus spread across the United States the first policy response consisted primarily of shutting down broad segments of the economy.  Predictably, stock and bond markets sold off dramatically as investors rushed to cash and treasury securities.
  • In the midst of this sell off, credit markets almost seized up completely.  Mutual fund and ETF liquidations pushed dealer inventories up against regulatory and risk limits. Liquidity was almost non-existent even for highly rated corporate credits.  In mid-March the Fed stepped in, buying and lending against a wide range of assets, easing the stress points.  This has allowed the markets to trade and work toward healing, avoiding a complete collapse that could have crippled the capital formation process in this country for years.
  • Equally important through this process is the fiscal response of the Federal government and the spread of the virus itself.  Trillions of dollars have already been allocated with more to come if deemed necessary in an election year.  The challenge will be in the efficiency of administration of these massive relief programs.
  • There are some encouraging signs the curve may be flattening, though disappointments on that front should be expected.  Pressure will build to allow more of the economy to open.  The market will be actively scouring all data to anticipate future earnings and defaults, but that too will be a noisy process. 
  • We believe the Fed is completely on the case and this sets a powerful foundation for economic stability that the market will not ignore.

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