Fed Policy action: Money Printer go Brrrr!! Get serious!

If you have college kids in your household, one of the benefits of them being home – and there are only a few, am I right or am I right – is that you remain up-to date on all the memes in social media.

The one most relevant today is – Money printer go Brrr!       

Check this out, if you want some cheap thrills: https://www.youtube.com/watch?v=O1hCLBTD5RM

This is of course referring to the current massive policy action of liquidity provision and quantitative easing by the Fed. I am assuming the purveyors of the meme don’t like it one bit.

But they are not alone. There are plenty of people in the financial commentariat who have similar memes going. Did the Fed Jump the shark? It is creating moral hazard of gargantuan magnitude! They are picking winners and losers! The Treasury and the Fed are now one! Etc, etc.

These memes in the financial press have two problems, especially relative to the opinion of the college kids:

 They are even more misplaced, especially coming from a group that ought to know better, and worse, they are less funny.

In the last few decades, the Fed has made a lot of mistakes. But classifying the current policy action as anything but fulfilling their core mission and delivering what a doctor would have ordered for the current malaise is just not correct.

There is a whole dictionary of Fed acronyms but at the end of the day, the Fed has essentially done three things:

a)     It has provided liquidity in the market – be it commercial paper facility, central bank swaps, or buying Corporate bonds and ETFs. And a whole lot of other acronyms.

b)      It has aggressively cut policy rates and provided guidance – rates are are close to zero and they have an unlimited QE program until inflation rises to its target, which is forever.

c)      It has created programs to support the flow of credit in the economy to make sure that we still have an economy left at the end of the current episode under the 13-3 provisions of the federal Reserve Act in concert with the US Treasury.

Once you boil it down as such, it becomes quite clear that the Fed has done exactly what it was obligated to do. And it has done it with overwhelming force and in the nick of time.

The first set of policy actions are rather obvious: This is what the Fed was created for: Fed was to be the liquidity provider of the last resort, the core reason for their existence in a fiat currency architecture. They were given the money presses so that at the time of such crisis they can make it go Brrrr! And that is what they have done. And unlike other parts of their effort, this expansion of their balancesheet actually goes away as things stabilize even if the economic conditions don’t improve. The CP facility or the central bank swap lines will self liquidate when the emergency is over. We have good evidence on that. The Fed is the only source of dollar liquidity in the world and they have done what they should have done according to their mandate by providing that liquidity to the global economy.

The second set of actions – the true monetary policy actions of cutting rates and unlimited QE  – is also justified and correct. As the global economy adjusts to this episode and savings rate go up, we face a deflationary spiral. Ensuring that they cause monetary and financial conditions to ease as much as possible is important and again a core part of their mandate. What would the critics have them do – fiddle with their tool chest while New York was burning.

The third set of actions, also, are justified, and were appropriately codified in the Federal Reserve Act. When economic circumstances are unusual and exigent – which Covid 19 obviously is – and the Treasury Secretary authorizes the Fed to use this authority, they have a blank check to lend money to anyone that will help the cause. Again, this is what was intended and this is exactly what they are doing.

In addition to fulfilling their mission, this has two important benefits: 1) It ensures that both fiscal and monetary policy is acting in a coordinated fashion, 2) With its access to the Money presses that can go Brrrr! to provide leverage and with the first loss piece provided the CARES act, and all the subsequent acts yet to be passed, it makes the political task of providing a lot of support to the economy much easier. The $350 billion allocation of the Cares act can turn into real credit flow of trillions – something the politicians could never get themselves comfortable to do. But, that is something that needs to be done.

The bottomline in this regard is that the Fed so far has done exactly what it was created to do. And it has executed their playbook faster and more forcefully than it has ever done in the past. For that they should be congratulated and shown some gratitude in that they weren’t as doctrinaire as some in the financial community would like them to be.

Besides, for financial market participants, a whole lot of discussion about the Fed actions is a pointless exercise at the moment. They have a good handle on the situation, at least I think so, and they will continue to execute on their plan. What we – capital markets participants – need to focus on is how things will work out under the current monetary policy regime rather than debating the merits of their actions. There will be plenty of time for that in a few years.

The real question for us – now that the issue of liquidity and monetary policy and transitional support to the economic agents is being helped along by the Fed -- is how do we get out of this mess. I don’t have the answers, of course, but my guess is that we will be in it for a while. Much the way markets were pricing in a decent outcome before the current crisis, they may still be pricing in a relatively smooth climb back. I am not so sure. I suspect, we will see a lot of volatility before we are all said and done.

But, one thing I am quite sure of – Without the Fed having done done all the things that it has done – and may be more things it will have to do in the future – the coming-out-of-the-crisis discussion would be a moot discussion. So, thank god, I live in a fiat currency regime and we have flexible and less doctrinaire people at the Fed.