Economists React: ‘Smartest’ Fed Move
WSJ.COM ECONOMICS BLOG
In TAFF
Economists and others weigh in on the the Fed’s expansion of its securities lending program.
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[This is] the smartest thing I’ve seen the Fed do in a long time? [The move] is based on the Fed’s existing securities lending facility with some key changes. First, the existing program is overnight lending only. Second, the existing program was a Treasury for Treasury switch only. The new facility is up to a 28-day term and accepts agency debt, agency residential [mortgage backed securities], AND AAA/Aaa-rated private label residential MBS. The last security class is currently not accepted via the RP facility announced Friday. This does not represent an increase in the Fed’s balance sheet, rather they are simply lending a portion of their existing Treasury portfolio ($709 billion) and replacing it temporarily with other securities. Given the size of the Fed’s balance sheet there likely is some room to further expand this program if necessary? A very powerful tool. –Drew Matus, Lehman Brothers
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The new facility should redress a major shortcoming of regular discount window borrowing and the recently launched term auction facility (TAFF). Because neither of those programs were available to non-depository institutions, investment banks and securities dealers have been dependent on those with direct access to the Fed for relief from funding strains, but the banks have seemingly been reluctant to serve as a conduit for such lending. The new facility will make it easier for the select group of non-bank intermediaries among the 20 firms designated as primary dealers to finance their own balance sheet. (By my count, 9 of the 20 primary dealers are NOT deposit-taking institutions and will directly benefit from this expanded access to Fed credit.) –David Resler, Nomura Securities
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By suddenly and dramatically increasing the supply of Treasuries the Fed has driven yields higher and flattened the curve. The odds on a [three-quarter-point rate cut] next week have dropped sharply too; the Fed will be happy. This will not turn the economy around or fix all the problems in the markets but it should reduce the liquidity issue, at least for now. –Ian Shepherdson, High Frequency Economics
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The good news is this will help brokers and banks; the bad news is it will do nothing to help the Housing market, or stop the decline in House prices. Nor will it help resolve the inverted pyramid of derivatives that sits atop Housing. And, one has to believe it will only add to inflationary pressures. No recession at any cost seems to be the Feds’ philosophy in light of the latest massive cash infusion to banks. –Barry Ritholtz, Fusion IQ
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By permitting borrowers to put up devalued collateral that currently contaminates the balance sheets of financial institutions [this move] should provide a generous bout of temporary relief to portfolios overweight with distressed assets. The outstanding question is whether this will be last unorthodox effort by the Fed or just the latest in a series of innovative initiatives to facilitate the proper functioning of credit markets and reflate the U.S. economy. Whatever the case we do not see this as a panacea for the problems that plague U.S. credit markets and the domestic economy. For now, the current Fed move will purchase a fortnight of peace. –Joseph Brusuelas, IDEAglobal
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Last week the Fed bought via repo transactions of Agency-Backed [residential-mortgage backed securities] while selling Treasuries also via repo agreements. The two moves were aimed at offered liquidity to the mortgage security sector while limiting the overall amount of reserves in the banking system to maintain the fed funds rate target. These new operations will avoid the two-step liquidity enhancement of the RBMS securities market. The Federal Reserve did not mention outright purchases of the Agency or RMBS securities. –Societe Generale
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The Fed has limited ability to address the credit concerns that have disrupted the flow of capital to some markets. However, in sectors such as agency [mortgage-backed securities] — where credit risk is virtually nonexistent — the Fed is willing to temporarily alter the composition of their balance sheet in an effort to restore liquidity. Of course, the next step would be to add MBS to the Fed?s balance sheet on a more permanent basis. Such action could receive serious consideration at next week?s FOMC meeting. –David Greenlaw, Morgan Stanley
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It’s not like the outlook for the U.S. economy has improved dramatically Tuesday, but it helps the market to muddle through while this is going on. –Adam Cole, RBC Capital Markets |
