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Powell opening statement:
Highlights
Decline in current quarter in GDP is likely to be the most-severe on record
Unemployment rate currently likely understates current unemployment rate
Some indicators indicate a rebound. Cites auto and retail sales in some sectors
Some indicators suggest stabilization in some sectors
Indicators of long-term inflation expectations remain fairly stable
We all want to get back to normal but a full recovery unlikely until people fee safe
Preserving the flow of credit is necessary
Ongoing purchases have improved financial conditions
We will increase holdings of holdings at least at the current pace, prepared to adjust as needed
We will continue to use powers forcefully, aggressively and proactively
Will put tools back in the toolbox ‘after the crisis has passed’
Yield curve control effectiveness ‘remains an open question’[size=5][b]Powell Q&A:
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We’re not thinking about raising rates, we’re not even thinking about thinking about raising ratesWe think policy is currently well positioned, otherwise we would change it
The path ahead of the economy is highly uncertain
We had 128 month expansion but never got inflation to sustainably 2% so we have to be humble
We’re going to be deploying our tools, all of our tools, to the full extent for however long it takes to get back to full employment
We would be prepared to tolerate or I should say to welcome very low readings on unemployment without worrying about inflation
We’re not thinking about raising rates, we’re not even thinking about thinking about raising rates
Many differences between now and the Great Depression
We ultimately do see a full recovery over time
We could see significant job growth in the coming months
It’s way too early to be changing longer-run forecasts
There have been gains in market…(awkward pause) functioning. We don’t take that for granted
We’re now in the final run-up to starting Main Street facility
We’re prepared to adapt further with all our facilities
This is the biggest shock in living memory and the fiscal response has been large, forceful and very quick; it’s 14% of GDP
It’s possible we will need to do more and it’s possible Congress will need to do more
Some different possible approaches to $600 unemployment supplement are out there and look promising
The evidence of one jobs report is that we might have bottomed in May but we’ll see, we’re not going to overreact to a single data point
Main Street lending will start ‘soon’[color=red][size=5][b]Ohhhh the humanity — 26 TRILLION in DEBT :ohmy:
and while there is good reason — USA must more wisely use it’s FED Budget :huh:[/b][/size][/color]
[size=5][b]Fed Announced New Secondary Market Corporate Credit Facility Where Will Buy Qualified Bonds Directly Rather Than Through ETF’s
[/b][/size]Effective June 15, 20201Facility:
Under the Secondary Market Corporate Credit Facility (“Facility”), the Federal Reserve Bank of New York (“Reserve Bank”) will lend, on a recourse basis, to a special purpose vehicle (“SPV”) that will purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase in the secondary market (i) eligible individual corporate bonds; (ii) eligible corporate bond portfolios in the form of exchange-traded funds (“ETFs”); and (iii) eligible corporate bond portfolios that track a broad market index. TheReserve Bank will be secured by all the assets of the SPV. The Department of the Treasury will make a $75 billion equity investment in the SPV to support both the Facility and the Primary Market Corporate Credit Facility (“PMCCF”).
The initial allocation of the equity will be $50 billion toward the PMCCF and $25 billion toward the Facility. The combined size of the Facility and the PMCCF will be up to $750 billion. Eligible Assets:Eligible Individual Corporate Bonds. The Facility may purchase individual corporate bonds that, at the time of purchase by the Facility: (i) were issued by an eligible issuer; (ii) have a remaining maturity of 5 years or less; and (iii) were sold to the Facility by an eligible seller.Eligible ETFs. The Facility may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.
Eligible Broad Market Index Bonds. The Facility may purchase individual corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. Eligible broad market index bonds are bonds that, at the time of purchase, (i) are issued by an issuer that is created or organized in the United States or under the laws of the United States; (ii) are issued by an issuer that meets the rating requirements for eligible individual corporate bonds; (iii) are issued by an issuer that is not an insured depository institution, depository institution holding company, or subsidiary of a depository institution holding company, as such terms are defined in the Dodd-Frank Act; and (iv) have a remaining maturity of 5 years or less.Eligible Issuers for Individual Corporate Bonds:
To qualify as an eligible issuer of an eligible individual corporate bond, the issuer must satisfy the following conditions:
1.The issuer is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States
2.The issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (“NRSRO”). If rated by multiple major NRSROs, the issuer must be rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020.
a.An issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, must be rated at least BB-/Ba3 as of the date on which the Facility makes a purchase. If rated by multiple major NRSROs, such an issuer must be rated at least BB-/Ba3 by two or more NRSROs at the time the Facility makes a purchase
.b.In every case, issuer ratings are subject to review by the Federal Reserve.1 The Board of Governors of the Federal Reserve System (“Board”) and Secretary of the Treasury may make adjustments to the terms and conditions described in this term sheet. Any changes will be announced on the Board’s website.3.The issuer is not an insured depository institution, depository institution holding company, or subsidiary of a depository institution holding company, as such terms are defined in the Dodd-Frank Act.
4.The issuer has not received specific support pursuant to the CARES Act or any subsequent federal legislation.
5.The issuer must satisfy the conflicts of interest requirements of section 4019 of the CARES Act.
Leverage: The Facility will leverage the Treasury equity at 10 to 1 when acquiring corporate bonds of issuers that are investment grade at the time of purchase and when acquiring ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds. The Facility will leverage its equity at 7 to 1 when acquiring corporate bonds of issuers that are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to 1, depending on risk, when acquiring any other type of eligible asset.
Eligible Seller: Each institution from which the Facility purchases securities must be a business that is created or organized in the United States or under the laws of the United States with significant U.S. operations and a majority of U.S.-based employees. The institution also must satisfy the conflicts-of -interest requirements of section 4019 of the CARES Act
.Limits per Issuer/ETF: The maximum amount of instruments that the Facility and the PMCCF combined will purchase with respect to any eligible issuer is capped at 1.5 percent of the combined potential size of the Facility and the PMCCF. The maximum amount of bonds that the Facility will purchase from the secondary market of any eligible issuer is also capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019, and March 22, 2020. The Facility will not purchase shares of a particular ETF if after such purchase the Facility would hold more than 20 percent of that ETF’s outstanding shares.
Pricing: The Facility will purchase eligible individual corporate bonds and eligible broad market index bonds at fair market value in the secondary market. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.
Program Termination: The Facility will cease purchasing eligible individual corporate bonds, eligible broad market index bonds, and eligible ETFs no later than September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System and the Treasury Department. The Reserve Bank will continue to fund the Facility after such date until the Facility’s holdings either mature or are sold.
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200615a1.pdf
Powell prepared testimony to the Senate
Significant uncertainty on timing and strength of recovery
Downturn could widen US inequality if not reversed
Some recent indicators have pointed to stabilization
Repeats that rates will stay near zero until the economy is on track
Full recovery unlikely until confidence is restored
Pandemic is hitting low-income households the hardest
Long-term inflation expectations ‘fairly stable’Fed’s Powell: Q&A
Expectations we will unemployment falling with function of lifting social distancing and reopening businesses but will leave us short of where we were
Return to investment will help … return in confidence for people
It’s going to take time to rebuild confidence
We appear to be in the beginning of the bounce stage
This morning’s retail sales number was more positive evidence
Economic rebound will leave us ‘well short’ of January levels[b]Boston Fed’s Rosengren:
[/b]
Economic rebound could be slowed by continued virus spread
More support likely needed from monetary and fiscal policy
Expects US unemployment rate to be double digits at the end of 2020
Fed is seeing steady stream of interest in May Street lending program“Of course there is a learning curve, but we are seeing tremendous interest in the loans from businesses,” he said in prepared remarks. “Lenders are determining how they’ll participate in and communicate about the program. Borrowers will need to persist during this ramp-up phase.”
Fed’s Rosengren interview with Yahoo Finance
We need to keep rates low at the short and long end
“We’re a long way away from raising rates”
When to give more forward guidance is under discussion
Second half of the year may be more-difficult than some believeFed’s Powell comments in prepared testimony
Economy has entered important new phase sooner than expected
Recent economic data offer some positive signs but output and employment far below pre-pandemic levels
Path forward extraordinarily uncertain, hinges on virus
Outlook also depends on relief provided by government to support recovery as long as needed
TALF has extended $252m loans so far
Repeats pledge to use all of Fed’s tools
Full recovery unlikely until people confident it’s safe[size=5][b]SF Fed’s Mary Daly at virtual economic forum
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Note: A nonvoting member on the Federal Reserve Board. Sshe would be hesitant to call recent positive signs a recovery
she sees no V-shaped recovery
sees US unemployment staying above 10% through at the end of the year under her best case scenario
if we can get virus under control, the recovery can take just 4 or 5 years
virus path to dictate pace at which unemployment declines
sees unemployment staying elevated even as workers returningJune FOMC meeting minutes:
Most Fed officials urged more explicit forward guidance
Officials agreed on need for more analysis of yield curve control
Fed was committed to using its full range of tools to support the US economy
In their discussion of forward guidance and large-scale asset purchases, participants agreed that the Committee has had extensive experience with these tools, that they were effective in the wake of the previous recession, that they have become key parts of the monetary policy toolkit, and that, as a result, they have important roles to play in supporting the attainment of the Committee’s maximum-employment and price-stability goals.
Participants agreed that the data for the 2nd quarter would likely show the largest decline in economic activity in post-World War II history
discussed whether yield curve caps or targets could support forward guidance and complement asset purchases
most officials urged more explicit forward guidance
most market participants did not anticipate policy changes at the June meeting. The target range for the federal funds rate was expected to remain at the ELB for at least the next couple of years, although many survey respondents attached some probability to the target range increasing in 2022.
Most of Fed officials urged more explicit forward guidance
officials expected strong second-half gain in consumption
a number of participants a judge of forward guidance on rates and bond buying should aim to support rapid economic recovery, foster durable return to 2% inflation
participants expected social distance in, saving in lower levels of employment and income to restrain the pace of expansion over the medium-term
participants agreed that for guidance and asset purchases have important role in meeting employment and inflation goals
consumer recovery not seen as rapid beyond 2020
most Fed officials urged more clarity on asset purchases
number of participants spoke in favor of tying forward guidance to inflation goals allowing a modest temporary overshoot of 2% target
participants stressed that health care, fiscal policy measures, and actions by households and businesses would shape recovery prospects
a couple favor guidance based on unemployment rate since it had been kept low in the past and could signal an extended period of support for the economy
full recovery in employment would take some time
a few participants favored forward guidance based on calendar promises, given the uncertainty about how fast the economy might recover
a 2nd wave of coronavirus outbreak was no less plausible than their baseline forecast scenario and if it occurred, economic disruption will be more severe and protracted
a few participants noted that current low rates of interest might limit the effectiveness of further asset purchases beyond those needed for market function
nearly all participants had many questions about the cost and benefits of yield curve targetsFed Governor Brainard:
There “may come a time” when yield curve control helps too but requires additional analysis
There is a “thick fog” of uncertainty and downside risks predominateForward guidance is a ‘vital’ way to provide necessary accommodation
Policy will have to shift from stabilization to accommodationTime and magnitude of distribution of additional fiscal support will remain vital to strength of recovery
Broad second wave of cases could reignite financial market volatility
Unclear whether rapid pace of labor market recovery will be sustained. Risks are to the downside[b]Beige Book prepared at the Federal Reserve Bank of Chicago based on information collected on or before July 6, 2020.[/b]
Highlights
Activity increased in almost all districts but remained well-below pre-pandemic levels
Outlooks remained highly uncertain, as contacts grappled with how long the COVID-19 pandemic would continue and the magnitude of its economic implications.
Many contacts who have been retaining workers with help from the PPP said that going forward, the strength of demand would determine whether they can avoid layoffs.
Contacts in nearly every District noted difficulty in bringing back workers because of health and safety concerns, childcare needs, and generous unemployment insurance benefits.
Prices were little changed overall but vehicle prices were higher on low inventoriesSt Louis: In comparison with our previous report, the outlook among contacts is slightly more pessimistic while also much more uncertain. The pace of recovery appears to have slowed since mid-June
Dallas: Outlooks improved, but the upward trend in new COVID-19 cases has increased uncertainty.
San Francisco: Economic activity in the Twelfth District contracted modestly
Chicago: Economic activity in the Seventh District increased strongly in late May and June, but remained well below its pre-pandemic level. Contacts expected further growth in activity in the coming months, but most did not expect a full recovery until at least the second half of 2021Fed’s Williams:speaking on Fed’s coronavirus liquidity program actions
Fed liquidity programs have helped ease credit market strains
Relatively low take-up of the Fed programs are a sign of success
Fed programs have helped ease credit market strains
Has seen significant improvement in credit market access
Scale and reach of the Fed’s response is an indication of the gravity and unique nature of the situation
Central banks emergency facilities demonstrate its commitment to prevent lasting damage to the economy
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