Home 2020 The Fed Changed its Playbook for the Market, Things Turned Out Good

The Fed Changed its Playbook for the Market, Things Turned Out Good


#PresidentTrump #ChairmanPowell #Fed #playbook #market #liquidity #coronavirus #chaos


The Fed’s response to the coronavirus chaos began on 28 February with a short statement of faith in the economy from Chairman Powell to calm diving financial markets.

Within a few wks its actions with those of the White House and Treasury cast it as creditor to the world and open to huge amounts of risky debt.

The Trump Fed crossed lots of red lines that had not been crossed before.

Chairman Powell said in the Spring, “We saw the economies around the world shutting down and we felt called to do what we could.

That included promises of massive bond purchases, an open window for dollars for other central banks, and eventually loan programs covering virtually any US business and many local governments.

The Fed’s balance sheet grew much less than expected proving alarmist wrong, its most controversial lending programs attracted modest interest and will end on Thursday, 31 December 2020.

The Fed proved that it mattered being there and moving fast.

The Fed could not address all the economic problems of the emergency chaos. Its biggest challenge was getting cash to families as unemployment hit a post-World War II record 14.7% because that required an Act of Congress.

It took months to flesh out its innovative responses, but the Key steps happened with the turn of a screw in March when its traditional tools including the offer of short-term loans to financial firms were deployed with full force.

The speed and size of the Fed’s initial steps “rewrote the playbook.”

The Fed started buying up assets in the $100’d of Bs and restarting markets, there was little restraint. The Mission: do it until it works.

That was a stark contrast to its response to the Ys 2007-2009 financial crisis, when it took about 4 yrs to scale up 3 straight QE programs

Last Spring the US economy faced lots of frightening risks.

President Trump’s efforts to control the spread of COVID-19 triggered a national state of emergency on 13 March, and restrictions forcing whole sectors of the economy to close temporarily.

The stop for airlines, hotels, restaurants and anything “non-essential” wiped out 22-M jobs from February to April, auguring fears of a 2nd Great Depression.

For the world central banks, crises are most perilous when confidence is corrupted. When what is considered a risk-free trade 1 day, with 2 parties trusting they will both be around 1 day, looks iffy the next day.

That loss of faith can bring a halt to the short-term lending that keeps the broader economy humming and triggers a wider collapse.

That started to happen in March, the Fed’s initial moves propped up trading in Treasury bonds, short-term corporate loans, and other essential financial instruments, thus preventing a financial crisis from being stacked on Top of all of the other problems

It took much less than we all thought under President Trump’s leadership.

Analysts including former New York Fed President William Dudley forecast the Fed’s balance sheet would be $10-T+ by the end of Y 2020.

From mid-March to mid-June the mass buying of assets inflated the Fed’s holdings from $4.2 to $7.1-T. Then the expansion stopped, and the balance sheet has not budged much since then.

The Big Q: Why?

The Big A: Because in this crisis, private markets knew that the President and the Fed stood at the ready, provided lots of credit on their own, fueling the economy and keeping risk in private hands rather than loading it onto its books.

That was a happy outcome, because the announcements from the White House and the Fed helped investors get comfortable again. And the market took off and has not looked back.

Today, 12.15p EST all of the benchmark US stock market indexes are trading just a bit off of record highs.

And Senate Majority Leader Mitch McConnell (R-KY) is encouraging Republicans to back the $2000 stimulus aid/relief payments of American citizens, the Senate will vote this wk on the measure.

“$2000 for our great people, not $600! They have suffered enough from the China Virus!!!” President Trump Tweeted.

The last 9 months have been difficult, but the economy at the end of Y 2020 will be about the size of Q-1 Y 2019.

It was a crisis that really shocked an otherwise healthy economy. A resolution to the virus chaos now appears in view as the 1st vaccines rolled out under President Trump’s Operation Warp Speed this month, something many experts said was impossible.

President Trump has shaped up to a Man of Miracles.

The economy is in a technical recession, as millions of families face hardship and months until the full impact of the vaccine is felt and herd immunity has been established.

Through the year, the Fed’s role has been somewhat redefined. The China Virus chaos forced it into close cooperation with the Treasury, and into a more important future role in keeping government borrowing costs low as the nation finances record levels of public debt.

Going in, the naysayer gloom and doomer’s talk was that monetary policy was kaput, the Fed had no more tools.

Instead, under President Trump’s leadership and Chairman Powell’s guidance it was very impactful. The game changed dramatically for the good.

“The Democrats should learn a lesson from the benefits of working together as the Fed, the Treasury and the President have demonstrated so well. The lessons of pork-barrel legislation should had been learned but up to today it unfortunately still exists with the demands included in the revised $2,000 stimulus bill. Unfortunately, with the lower income families and those unemployed, delay after delay has unnecessarily occurred. 

Perhaps, some day the reality of single subject legislation will be learned and politicking will be put aside. What is amazing is for example what do military statutes have to do with a critical overdue stimulus relief package Nothing ! So why are certain politicians injecting that under a stimulus package. 

My hope is that the American people learn from this unfortunate predicament and get rid of those politicians who enjoy making idiots out of us, thinking that they are responsive to the people’s need when in reality, they are only hurting us in putting much needed food on the table.

However, maybe in times of such need, we should put their paychecks in jeopardy (bluntly just not paying them) and maybe that is one of the solutions that they should feel the hurt from, just like their lower, less fortunate constituents.” says economist Bruce WD Barren.

Have a healthy day, Keep the Faith!

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Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.