The Fed doubles down as we wait on Congress

On March 23, 2020, the Federal Reserve announced wide-ranging policies to further inject liquidity into markets and extend credit to ailing sectors.
March 2020

On the morning of Monday, March 23, 2020, the Federal Reserve announced wide-ranging policies to further inject liquidity into markets and extend credit to ailing sectors. These programs are an alphabet soup of Financial Crisis era programs such as Term Asset-Backed Securities Loan Facility (TALF) and new programs such as the Secondary Market Corporate Credit Facility (SMCCF). These programs act as a pressure release valve for lending markets that have largely seized up in the face of substantial fund redemptions from worried investors.

We find the Fed’s swift action to support the market and the economy encouraging. In contrast to 2008, when the Fed had to create an entirely new playbook from scratch, the 2020 Fed has a much better handle on effects of illiquidity and the tools and framework to tackle it. Purchases of not only Treasuries but also corporate bonds should keep capital markets open for businesses to acquire medium-term funding. Providing liquidity to money market mutual funds and commercial paper facilities helps businesses roll over short-term debt. The open-ended nature of the Fed’s commitment also provides confidence for investors that the Fed will remain a buyer of last resort should conditions deteriorate further.

Fed action alone cannot create economic growth with its suite of programs. For that we will need massive fiscal stimulus, the first leg of which Congress should be able to pass shortly. The Fed can, however, deploy its toolkit to ensure the sharp economic contraction does not turn into a liquidity crisis and spiral out of control. We view these programs as defensive stop-gaps to protect the economy as we wait for fiscal stimulus to take hold. Functioning markets are necessary to ensure businesses can borrow money and weather the coming quarter when the US economy grinds to a virtual standstill. 

The Fed is likely not done. They also announced the establishment of the Main Street Business Lending Program to provide lending to small and medium sized businesses. We will await further detail on this program and others over the coming days and weeks. As investors, we are thus far heartened by the bold and decisive action from the Fed as they continue to roll out further programs. Now we await Congress. (Update: March 25, 2020. Congress comes through in a big way.)

Subscribe to our insights


Views and opinions have been arrived at by BMO Global Asset Management. The information, estimates or forecasts provided were obtained from sources reasonably deemed to be reliable but are subject to change at any time. This publication is prepared for general information only; it should not be construed as investment advice or relied upon in making an investment decision. All investments involve risk, including the loss of principal. Past performance is not a guarantee of future results.

Related articles

No posts matching your criteria
September 2020

The Fed’s new framework and its evolving reaction function

For investors, the implications are likely to be a more durable long-run “risk on” environment, a flatter yield curve and a depreciating dollar.

September 2020

Turning up the heat on a boiling pot

The passing of Supreme Court Justice Ruth Bader Ginsburg has created a vacancy in the U.S. Supreme Court with only weeks until the November election.

August 2020

Biden goes the predictable route

After a lengthy vetting process, Democratic presidential candidate Joe Biden selected Senator Kamala Harris as his running mate for the 2020 presidential election.

July 2020

The U.S.-China relationship in a changing global economy

An inevitable blame game between the U.S. and China has followed COVID-19, but the crisis has really just extended the “trust deficit” that has been steadily building between the two countries in recent years.

July 2020

COVID-19 isn’t going away

We think the most detrimental economic effects of the virus are unlikely to return, though the human cost may become more painful yet in the U.S.

July 2020

The hidden value in corporate bonds

Since late March, US investment grade corporate bonds have recovered approximately 80% of their Covid-driven spread widening.

June 2020

Thematic investing and the Post-COVID world

In the third in our series of virtual mini-forums, we discussed thematic investing post-COVID in one session and the outlook for oil in another.

June 2020

Blink and you missed it

An investor finally opening up their account statement on June 8 would be forgiven for assuming it has been a quiet year in the markets.

May 2020

U.S. policy: Pandemic puts the heat on China while tech regulation simmers

We focus on four areas of U.S. policy crucial to our near-term economic outlook: fiscal stimulus, U.S.-China relations, regulation of technology companies and the 2020 U.S. elections.

May 2020

Analyzing the opportunities for active management

While the longer-term effects of the virus are uncertain, we expect economic weakness and market volatility to continue presenting opportunities for active management.

April 2020

Virus starts with v but ends with u-shaped

We have seen second-quarter annualized GDP estimates ranging from -5% to -30%, but the unprecedented combination of a pandemic and the modern global economy makes this very difficult to call.