Blog The Fed: Avoiding a Depression The Fed’s aggressive support may help keep markets functioning, hasten recovery and avoid longer-term damage.
The U.S. economy will enter a recession this year, but the Federal Reserve’s 23 March announcement that it will buy an unlimited amount of Treasury and mortgage-backed securities (MBS) and introduce numerous facilities aimed at stabilizing the financial system may help avoid longer-term damage and accelerate economic recovery. The Fed’s immediate goal is to keep credit flowing to the real economy. In recent weeks, the sheer size of the risk aversion and flight-to-cash exhibited by investors has overwhelmed financial markets and the securities dealers and banks that are charged with intermediating markets and distributing capital throughout the financial system. Unprecedented volatility in Treasury and mortgage-backed securities (MBS) markets – which are supposed to be the safest asset markets – exacerbated this flight to cash, and propagated large price dislocations in other sectors of the bond market, including credit and structured product markets. Regulatory- and pandemic-related operational constraints for financial institutions with access to conventional Fed lending, (e.g., through the discount window and term repo operations) hindered their ability to use the Fed’s short-term loans to stabilize markets. As a result, the Fed had to think of new ways to more directly support credit markets, corporations, and small businesses. Fed goes all in On Monday, the Fed announced unprecedented actions which did just that. In addition to taking a page from its 2008 financial crisis playbook, by announcing an open-end program to buy Treasury and MBS securities, it announced various new facilities to deal with this unique economic shock. Unlike the 2008 financial crisis, which hit banks and financial institutions, the non-financial corporate sector is the epicenter of this crisis. And to direct more targeted support to these sectors, the Fed announced it will create new Special Purpose Vehicles (SPVs), which will provide medium-term loans directly to corporations, buy existing high quality corporate debt securities in secondary markets, and make loans against asset-backed securities (ABS) held by a broader range of investors than just banks and broker-dealers. These measures add to other programs introduced last week that will further support short-term corporate lending through commercial paper issuance and ensure that prime money market funds, which traditionally invest in short-term corporate debt, have ample direct access to liquidity in the event of redemptions. All told, the size of the Federal Reserve’s balance sheet has already surpassed the $4.5 trillion maximum level reached after the 2008 financial crisis, and we think it could well surpass $6 trillion before all is said and done. Overall, these programs – along with additional expected direct support from the federal government in the form of payments to households, credit to small businesses and direct bailouts to industries particularly affected by mandated business closures – will go a long way to assist a wide range of markets and institutions. The bill Congress is working on could provide between $1.5 –$2 trillion (7%–9% of GDP) to the economy, and allow the Fed to increase the size of its lending facilities, ultimately providing $4 trillion in additional lending capacity to the economy. Aiming for a swift recovery Still, it’s important to keep in mind that these programs aren’t a panacea and won’t prevent a U.S. recession (indeed, high frequency data suggest that the U.S. may already be in recession). The U.S. economy is currently suffering from three material economic shocks, as global trade disruptions, mandated domestic business closures, and disruptions in lending from severe financial market stress will contribute to a large contraction in U.S. economic activity in 2Q. However, the policies can help the economy avoid a depression. By providing households and businesses with funding to bridge the mandated business disruptions, the economy can normalize more swiftly after the virus subsides, and avoid the longer-term economic damage that can result from a wave of bankruptcies and a rise in number of long-term unemployed. Please see PIMCO’s “Investing in Uncertain Markets” page for our latest insights into market volatility and the implications for the economy and investors. READ HERE
Blog Assessing Inflation’s Effects Across Emerging Markets The varied responses of individual countries to global inflationary pressures have contributed to elevated real-rate differentials between developed and emerging markets.
Blog Power of Representation: the ‘Us’es’ To celebrate Pride Month, four PIMCO executives share their perspectives on inclusion and diversity in the workplace and the importance of visible representation.
Blog Secular Outlook Key Takeaways: Reaching for Resilience We believe shorter business cycles, elevated volatility, and diminished policy responses warrant a focus on portfolio resilience over reaching for yield.
Secular Outlook Reaching for Resilience Volatility, inflation, and geopolitical strain have countries and businesses focusing on defense. We argue for building resilience in portfolios in this fragmenting world, and delve into risks and opportunities we foresee over the next five years.
Viewpoints Active Versus Passive in Global Funds Active global bond funds distributed in Europe, Asia and Africa have outperformed their passive peers.
Blog After Historic Market Moves, Outlook for Bonds Improves This year’s surge in yields is restoring value to the bond market, especially with the likelihood of a recession rising, although it remains uncertain when market momentum might turn.
Blog Chinese Financials Feeling the Squeeze Amid Sluggish Credit Demand Following strong double-digit profit growth in FY2021, we expect Chinese banks will be less profitable this year as COVID-19 lockdowns continue to disrupt China’s economy.
Blog Hazy Outlooks for Monetary Policy, Virus Roil Yield Curves and Boost Bonds Uncertainties that caused U.S. Treasuries to rally and yield curves to undulate in November may persist and could contribute to volatility into year-end.
Blog After Historic Market Moves, Outlook for Bonds Improves This year’s surge in yields is restoring value to the bond market, especially with the likelihood of a recession rising, although it remains uncertain when market momentum might turn.
Blog Fed Battles Inflation Despite the Costs The Federal Reserve ratchets up the pace of monetary tightening, raising questions about the U.S. growth outlook.