Headquarter of the Federal Reserve in Washington DC. Image source: Mesut Dogan © 123RF.com
The Federal Reserve Board announced yesterday its decision to enhance FED's asset purchasing program in the capital markets through its Secondary Market Corporate Credit Facility (SMCCF).
In the update that was published on FED's website, it was stated that the bank would:
"[…] begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers."
The SMCCF has been 'established with $75 billion in equity provided by the Treasury Department.
Unlike FED's better-known asset-purchasing programs in the primary markets that are intended to buy government treasuries and other such securities, the SMCCF scheme is designed to pump up liquidity directly in the corporate markets.
The former is considered to be the more conventional approach to conducting looser monetary policy. In contrast, the latter represents a more idiosyncratic method, which was given more prominence in the context of the current coronavirus crisis.
Due to the unpredictable nature of the economic fallout and the still looming uncertainty from the constantly evolving pandemic, the FED alongside other central banks was prompted to find increasingly innovative ways to maintain a high degree of liquidity in the secondary markets, as big corporations struggle to survive.
FED's SMCCF program parallels in specific ways ECB's PEPP envelope (Pandemic Emergency Purchase Program), in that both intend to negate the ripples to the secondary markets that are caused by the pandemic.
Such programs are indispensable given the context of the coronavirus crisis and the unprecedented threats to the private sectors; however, there is also quite a substantial risk associated with central bank's involvement with corporate bonds.
Yesterday's actions of the Federal Reserve Board have prompted a sizable backlash from some market experts, as they were perceived to represent a direct response to the recent crash that was observed in the stock market.
Due to a distinctive difference between the overall economic stabilisation and the performance of the stock market, which was observed over the last several weeks, the Board's actions were received with a certain dose of scepticism.
Some have speculated that SMCCF is intended to prevent similar stock market crashes in the future, which is not necessarily going to ensure economic recovery due to the aforementioned gap between growth and the stock market.
The decision has strengthened the dollar in the short term, which could potentially turn into a new Markdown on the EURUSD. As can be seen on the 4H chart below, the price action so far fails to break out into the Distribution range's area.
EURUSD 4H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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