The Ultimate FED PUT

It all started on 19 Feb 2020 S&P was 3386.15 - Great descend , when market actually realized the potential of Covid-19. Fast forward a month and , S&P lost almost 35% and closed 2191.86. Now on June 05, S&P is 3194.15. Quite a turnaround . right?

One of the major reason for this Federal reserve. J Powell has a solid market credibility that FED will do whatever it takes to support the economy (even buying High yield bonds, if required).  So far there are 9 emergency steps taken by Fed, some of them are :

March 15 -  They decided to lower the target range for the federal funds rate to 0 to 1/4 percent (Lower by 100 basis point). Also they will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.  liquidity will be increased via the standing U.S. dollar liquidity swap line arrangements.

March 23 - QE4 - The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.

April 16  - Paycheck Protection Program Liquidity Facility - This is to provide liquidity to eligible financial institutions, which will help support small businesses. The Small Business Administration's Paycheck Protection Program, or PPP, guarantees loans extended by qualified lenders to small businesses

June 10th  FED will stay at zero rates till 2022. Asset purchases would be about $80 billion a month for Treasuries and about $40 billion of mortgage-backed securities

Secondary Market Corporate Credit Facility  Fed will buy individual investment grade bonds. Earlier they were investing in Bond index ( so far $ 5.5 Billions has been used out of $250 billions). Current direction is to buy individual corporate bonds using in-house index.

Main Street Lending program (Starting June 15th) -  This is for small/medium size business (15,000 employees / $5 Billion revenue). They will lend $600 billions through three facilities and the loan will range from $250,000 to $300 millions. Initially bank will lend but FED will buy 95% of the loan , with only 5% remaining on bank books to make sure they do their due diligence.
 FED has enough tools and is willing to do "whatever it takes" to support the economy. According to J Powell, recovery will be slow, especially in the travel & leisure. And some of these jobs will never come back or come back slowly so we need this. His exact words about the rates  "We are not even thinking about thinking to raise rates".

With historic low interest rates,  business can access to easy/low interest loans, they can use it for buy back (as they usually do). Also low mortgage interest rates will be a boom for home owners and REITS.  

Although there is a significant risk of second covid-19 wave  and the resulting lock down/bankruptcies as a result of . 

In Conclusion, all this leads to a bright future for equities/medium dated bonds with risk involving covid-19 second wave.               

Fed-Balance Sheet Week Jun 3 2020 ( Source - Yardeni Research)



Fed Dot Plot - June 10 2020