Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Macro and Market commentaries

Fed backstops the economy with $2.3trn in measures

  • 09 April 2020

David Page, Head of Macro Research at AXA Investment Managers, comments on the recent developments at the US Federal Reserve:

  • Fed announces $2.3trn worth of measures aimed at helping to get cash into the economy.
  • The Fed announced a range of measures, backed by Federal government funds, to purchase loans, bonds and securities to ease credit provision to households, small and large businesses, municipal and state governments.
  • In every instance the Fed is trying to expedite lending to agents across the full range of the economy as it is affected by coronavirus.
  • Fed Chair Powell spoke in a separately organised webinar. He stated that the Fed would “shepherd the economy through difficult times”.
  • He went on to discuss his hopes for a “robust recovery”, the Fed’s role in lending, but not spending in the economy, and that inflation was far from a concern for the Fed at present.
  • Financial market reaction was muted, with yields broadly stable, equities firmer and the dollar weaker.

The Federal Reserve announced additional actions today amounting to $2.3trn (10.5% of GDP) of support to the economy. Fed Chair, Powell, stated that the “country’s highest priority must be to address the public health crisis” and that the Fed’s role is “to provide as much relief and stability” as possible. The Fed announced the following measures:

  • Paycheck Protection Program Liquidity Facility (PPPLF). To provide term financing to eligible financial institutions backed by loans to small businesses in the government’s PPP scheme to bolster the effectiveness of this program. PPP is a key scheme to provide loans (and grants if employment is retained) to small business but was hindered by financial institutions liquidity. The Fed is now stepping in as the backstop to that liquidity.
  • The Main Street Lending Program. Buying up to $600bn in loans to backstop credit to small and medium-sized business.
  • Expansion of size and scope of Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and the Term Asset-backed Securities Loan Facility (TALF). All three scheme operate through Special Purpose Vehicles (SPVs) that allow the Fed to purchase up to $850bn in credit, backed by $85bn from the US Treasury.
  • Municipal Liquidity Facility that will offer up to $500bn in lending to states and municipalities, with $35bn of credit protection from the Federal government.

While each of these individual programs addresses very different markets and has a range of different associated fees, spreads and costs, the principle is the same for each: getting cash into the economy. By offering to purchase the underlying loans and securities from eligible financial institutions the Fed aims to ensure the flow of funds to small and large businesses, households and municipal and state governments. This is designed to overcome the constraints that individual financial institutions face, arising from credit aversion, cost of capital and – even for the largest of US banks – balance sheet size, given the enormity of the lending required. This should allow individual financial institutions to undertake the necessary checks with regards to origination of loans, which the Fed has no capacity to undertake, but allow the Fed to employ its much larger balance sheet to hold the loans, while effectively being indemnified from loss by the Treasury’s equity contribution. This is done in a financially efficient way, through the creation of an SPV, to allow the Fed to make large scale purchases, backed by a relatively small amounts of capital provided from the Treasury. The Treasury has earmarked $450bn of such capital, with the Fed schemes announced to date using just under $200bn. This provides more capital to back further schemes if deemed necessary, extend current schemes further, or backstop greater than expected losses in any of the schemes if necessary. The scale of this scheme illustrates the enormous difficulty of getting the scale of loans and access to finance into the economy quickly enough to support the full range of agents in the economy.

Fed Chair Powell gave a separately arranged Webinar in coordination with the Brookings Institute. He spoke only in very broad terms about the Fed’s role in what he described as “very difficult times” and talked of the Fed “shepherding the economy through these difficult times”. However, he did address a number of broader issues. First, he described the Fed as part of an effort to provide a bridge from the pre-crisis economy to the other side. Second, he talked about the prospect of a “robust recovery”, which he said “many expected to start in H2 2020”, but whose precise timing will fundamentally depend on the path of the virus itself. Third, he emphasised that the Fed was not undertaking spending decisions but was enabled to lend to financially sound institutions on a secured basis, adding that many of the measures undertaken recently were done so on an emergency basis and only under the oversight of Treasury Secretary Mnuchin. Fourth, Powell reiterated our own much repeated observation that many of the concerns individual express about inflation from the Fed’s lending programs and security purchase schemes echo the 2008 concerns that QE would result in high levels of inflation. Powell emphasised that the evidence of the last decade had not seen high levels of inflation stating that “today too high inflation is not a first order concern – far from it”. Fifth, Powell stated that monetary policy was where they wanted it for now, with Fed focus being on these lending programs.

Financial markets have once again had much to digest today with the announcement of the Fed’s scheme, a second 6m plus (6.6m) weekly increase in jobless claims, the Fed Chairs comments and the sharpest recorded drop on record in consumer confidence. Yet market reaction has so far been modest. 2-year yields were unchanged at 0.24% after the Fed’s measures were announced, but dipped 2bps to 0.22% as Chair Powell spoke. 10-year government yields initially rose 4bps to 0.77% but have settled back to 0.75%. Meanwhile the S&P 500 equity index rose to over 1% before Powell spoke, but is currently is 0.7%. The dollar is more consistently lower, down 0.5% against a basket of currencies.


    Notes to Editors

    All data sourced by AXA IM as at 09 April 2020.

    About AXA Investment Managers 
    AXA Investment Managers (AXA IM) is an active, long-term, global multi-asset investor. We work with clients today to provide the solutions they need to help build a better tomorrow for their investments, while creating a positive change for the world in which we all live. With approximately €801 billion in assets under management as at end of December 2019, AXA IM employs over 2,360 employees around the world and operates out of 28 offices across 20 countries. AXA IM is part of the AXA Group, a world leader in financial protection and wealth management.

    • Visit our website: www.axa-im.com  
    • Follow us on Twitter: @AXAIM & @AXAIM_UK
    • Follow us on LinkedIn: https://www.linkedin.com/company/axa-investment-managers   
    • Visit our media centre: www.axa-im.com/en/media-centre

    AXA Investment Managers UK Limited is authorised and regulated by the Financial Conduct Authority. This press release is as dated. This does not constitute a Financial Promotion as defined by the Financial Conduct Authority and is for information purposes only. No financial decisions should be made on the basis of the information provided.

    Issued by AXA Investment Managers UK Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No: 01431068 Registered Office is 22 Bishopsgate, London, EC2N 4BQ. 
    A member of the Investment Management Association. Telephone calls may be recorded or monitored for quality.

    Information relating to investments may have been based on research and analysis undertaken or procured by AXA Investment Managers UK Limited for its own purposes and may have been made available to other members of the AXA Investment Managers Group who in turn may have acted upon it. This material should not be regarded as an offer, solicitation, invitation or recommendation to subscribe for any AXA investment service or product and is provided to you for information purposes only. The views expressed do not constitute investment advice and do not necessarily represent the views of any company within the AXA Investment Managers Group and may be subject to change without notice. No representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.

    Past performance is not a guide to future performance. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Changes in exchange rates will affect the value of investments made overseas. Investments in newer markets and smaller companies offer the possibility of higher returns but may also involve a higher degree of risk.

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.