Month: April 2020

Are Tesla retail investors simply unfazed by the coronavirus panic?

Perhaps a better question to ask would be: what continues to cause Tesla’s stock price to soar over the last couple of weeks while the company has been completely idled, argued with Alameda county authorities and recently just disclosed that its own CEO is now indemnifying its Board of Directors in lieu of D&O insurance?

That’s one question Reuters starts to address in a recent piece where they note, innocently, that the coronavirus for some reason hasn’t had an effect on Tesla’s stock price. Analysts and institutional investors remain focused on Tesla’s 2020 cash flow and potential ideas for boosting demand, but it appears retail investors simply don’t seem to fear the virus’s impact on the company.

After all, here’s how Tesla stock has performed while the global economy has ground to a halt and the worldwide automotive sector has all but imploded:

Rather, retail investors seem focused on great sounding stories, but not ones that will necessarily impact the company’s bottom line in a positive way over the short term.

For instance, Reuters says that questions for the company’s upcoming Q1 conference call including questions about “Tesla’s steps to expand into the robotaxi market, the company’s self-driving technology and even plans to create airless tires to reduce maintenance costs.”

That’s right: forget about burning billions of dollars per year and the global pandemic, let’s talk about airless tires.

Of the top 50 questions submitted, only 4 refer to the virus and safeguards that Tesla will implement to protect its employees at U.S. factories. The questions for the conference call are now essentially being crowdsourced in Reddit-like fashion from retail at this website.

Elon Musk, on April 29, Tweeted: “FREE AMERICA NOW”, ostensibly in an push to get his Fremont factory up and running again. We had previously reported that Musk wanted to bring workers back to Fremont before the county’s stay-at-home order expired, but had reversed that decision after it was widely reported in the media.

But anticipation about the upcoming conference call, or airless tires for that matter, still may not adequately explain the stock’s wild recent move higher for some people.

The issue was raised on Tuesday in a podcast with well known Tesla skeptic “Montana Skeptic”, who recently authored an article about Tesla potentially turning into a Chinese company that we highlighted just days ago. 

“When you look at the share price, do you think about things like [Elon’s] compensation package, which requires a $100 billion market cap?” Skeptic was asked by the host.

Skeptic responded: “I don’t know. It’s easy to become conspiratorial because the price is just so outrageously detached from fundamentals and because the level it’s reached appears to be conveniently close to what he needs to achieve his next compensation award. I mean, as I tell the people who read my articles, right now stay away from this.”

“There are forces larger than us moving this share price. There are forces larger than us. Do I fully understand them? No. Might it be Chinese money? Sure. Might it be offshore accounts of some sort? Possible. Might there be some unseemly things going on? It’s always a possibility, too,” he continued.

Skeptic concluded: “Regardless, my innocent assumption is there are a lot of people out there including big institutional investors that still either believe in the growth story or believe that it hasn’t ended yet and that it makes sense to ride this thing with a momentum trade. And that’s what we have to deal with.”

In our preview of what the Fed will announce at 2pm today, we noted that one thing the Fed, which is largely expected to do nothing as it digests the consequences of its battery of interventions in the past month, is likely to do is to hike the Interest On Excess Reserve (IOER) rate from 5bps to at least 10bps to relieve some of the downward pressure on the effective fed funds rate which is trading just 5bps above zero; pushing the IOER higher by 5bps could enable fed funds to trade closer to the mid-point of the 0-25bps range.

However, not everyone is so sure the Fed will go ahead with this attempt to re-normalize the IOER (as a reminder, the Fed cut it several times in 2019 when, during the period of “scare liquidity”, the effective fed funds traded above the IOER).

In a note from Deutsche Bank’s rates strategist Steven Zeng “Why an IOER hike may not be in the cards at the April FOMC meeting”, he explains that currently, the futures market is pricing a 3bp increase to the effective fed funds rate (EFFR) for May, which broadly translates into a 60% chance of a 5bp IOER hike. Indeed, in recent years, the Fed has shown a tendency for adjusting the IOER rate when the EFFR has moved within 5bp of the upper or lower bound of the policy target range, an implementation that it describes as purely technical to support the trading of EFFR closer to the middle of the range. However, the April meeting will take place under a set of new and extraordinary circumstances, with the Fed providing unprecedented amount of support for the financial markets. As such, Zeng thinks the calculus for an IOER adjustment has also changed.

As a result, he  presents the argument for why we the Fed will not hike IOER this afternoon, even if it is not the official Deutsche Bank house view.

But first, a quick refresher on IOER arbitrage

Recall that the IOER rate acts as a floor for fed funds, although not a very good one because the Federal Home Loan Banks who are structural cash lenders can trade fed funds but cannot earn IOER. In times of ample reserves, US banks (including branches of foreign bank organizations) borrow from the FHLBanks at rates below IOER and earn the riskless EFFR-IOER spread. These arbitrage activities help IOER act as a magnet for most money market rates and they give the Fed the ability to lift its policy rate by raising IOER rate. Two important things to note:

1) the EFFR-IOER arbitrage is risk-free but not costless. Banks incur a charge associated with these trades because they increase the size of their balance sheet;

2) Since EFFR is a market-determined rate, the EFFR-IOER spread is also driven by market forces. In an ample-reserves environment, this spread mainly reflects the cost of regulatory hurdles banks need to overcome for the arbitrage to be profitable. The higher the hurdle, the wider this spread needs for banks to be willing to engage in the arbitrage. Prior to 2019, two of the biggest regulatory hurdles were the FDIC surcharge and leverage ratio rules. Both of these penalized banks for increasing their balance sheets. These stringent rules resulted in a very wide EFFR-IOER spread prior to 2017, when reserve balances were exceedingly ample.

Less regulatory friction enhances the Fed’s rate control

The FDIC surcharge was eliminated in 2019. As the coronavirus pandemic wreaked havoc on financial markets, the Fed temporarily eased leverage ratio rules for banks in April. The changes include the exclusion of central bank cash from the calculation for large banks and a lower leverage ratio for many community banks. Through these measures, the Fed gave banks more flexibility over the size of their balance sheets, a tool that it crucially needs to channel credit through the financial system. As Fed injected hundreds of billions of dollars in liquidity, banks were able to take the cash onto their balance sheets. Moreover, with lower regulatory hurdles banks  again began to arbitrage the difference between the fed funds rate and IOER. Their competition for borrowing help drive up the price of fed funds and keep EFFR close to IOER.

Indeed, as reserve balances surged to a record in April, the EFFR-IOER spread initially fell to -5bp but has stayed at that level since. During this period, fed funds transaction volumes flourished, and cash assets in US commercial banks and FBOs had a commensuration rise, which is strong evidence of IOER arbitrage trades. The stabilization of EFFR-IOER spread seems to reflect a near-term equilibrium of reduced regulatory costs for the arbitrage. To the extent this new equilibrium holds, it should provide a strong linkage between IOER and EFFR, giving the Fed more control over its policy rate and thus weakening the case for an IOER hike at the current juncture.

Pricing impact for the Fed’s easing facilities

An IOER hike and the accompanied repricing in fed funds OIS would lead to tighter pricing for many of the Fed’s easing facilities that are currently in use to ease financial market stresses and stimulate credit lending. These facilities include:

• FIMA Repo Facility (IOER+25)
• Central bank dollar liquidity swap lines (OIS+25)
• Temporary repo operations (OIS+5 for 1-month, OIS+10 for 3-month)
• Commercial Paper Funding Facility (OIS+110 for tier-1 and OIS+200 for tier-2 CP)
• Term Asset-Backed Securities Loan Facility (30D SOFR+150 for CLOs; 2yr and 3yr OIS plus a spread for various ABS collateral).

Most of these facilities are still in their nascent stage, and a tightening of their pricing so soon could blunt their effectiveness. While the Fed can reduce their pricing spreads after an IOER hike to keep overall pricing the same, doing so seems impractical. Finally, one might argue that OIS-based pricing would normalize if EFFR continues drifting lower. But as we noted above, this may not happen because of the stronger linkage between EFFR and IOER.

Low fed funds rate a policy design?

At zero lower bound, the decision to tweak IOER becomes more nuanced. Despite its efforts to paint this move as a simple technical implementation, the Fed is unlikely to completely look past the impact that a recalibration in IOER could have on monetary conditions. In 2012, with the economy slow to recover and the unemployment rate above 8%, the FOMC briefly contemplated slashing IOER by 10bp to push fed funds lower and help provide more monetary policy stimulus. It eventually settled on other measures that produced a bigger easing effect, but this anecdote backs up our view that at ZLB, an IOER recalibration is no longer a mechanical process.

Some people might point out that the Fed did not hesitate to hike the IOER rate in January despite coming off a string of rate cuts in late 2019. We would counter that at that time, the Fed viewed its monetary policy accommodation as broadly appropriate and was neutral in its policy stance. Therefore, an increase to the IOER rate carried less weight than it would today.

Finally, it’s entirely possible (and even highly likely) that the Fed has designed the  current set of policies to foster the fed funds rate to trade as low as possible (although rates sliding negative would be severely frowned upon by the Fed). Zeng finds the lack of mention of future IOER adjustments in the March meeting minutes as an endorsement of this view. In that meeting, the Fed launched several emergency measures that would bring reserve balances to moonshot levels within a short span of time. It seems uncharacteristic that a discussion of how to mitigate the effects record reserve levels have on EFFR would be missing, unless there was no intention to mitigate these effects.

In conclusion, with the ON RRP rate supporting fed funds at zero as a hard floor, and relaxed capital rules allowing vigorous trading volumes, the Fed is not at risk of losing control over its policy rate or the fed funds market drying up. The old reasons for adjusting IOER no longer seem to apply in the current context, and as a result the Deutsche Bank rates strategist sees “little motivation for the Fed to hike the IOER rate at its meeting next week “

Authored by Isabel van Brugen via The Epoch Times,

Two men have been arrested for allegedly attempting to sell 1 million KN95 face masks in New York City at double or triple the original price, violating the Defense Production Act, the Department of Justice said on April 28.

The U.S. Attorney’s Office said in a release Tuesday that the two individuals, 56-year-old Kent Bulloch and 64-year-old William Young, Sr., are being charged in a criminal complaint unsealed in a federal court in Brooklyn with conspiracy to violate the Defense Production Act.

The charges come after President Donald Trump on March 23 signed an executive order to prevent the price gouging and hoarding of “critical supplies” needed to combat the CCP virus outbreak.

“We have some people hoarding. We want to prevent price gouging and critical resources are going to be protected in every form,” Trump said at a press conference last month.

The White House said that the president is authorized under the Defense Production Act to prohibit the hoarding of needed resources.

Between March and April this year, the pair sought out investors to sell the protective masks for at least double the purchase price, court filings state. They then attempted to conceal the markup on the masks by falsely claiming in an escrow agreement that profits on the resale of the masks would not exceed 10 percent. A federal law enforcement agent posed as a purported investor, the release states.

“As alleged, the defendants conspired to turn a huge profit from the urgent need for surgical masks in New York during the pandemic,” stated U.S. Attorney Richard Donoghue said in a statement.

“When the attorney general said that those engaged in price gouging should expect a knock on the door, he meant it—and when we knock with one hand, we usually have a warrant in the other.”

Bulloch was arrested in California on Monday night and will appear in federal court via teleconference in San Francisco, while Young will appear via teleconference in Phoenix.

“This is precisely the type of price gouging for which Attorney General Barr created our nationwide task force,” said Craig Carpenito, head of the Department of Justice’s nationwide COVID-19 Hoarding and Price Gouging Task Force.

“The Department of Justice will not allow greedy profiteers to take advantage of the public during this health crisis.”

Last month, Attorney General William Barr emphasized that individuals who stockpile essential supplies will not be the target of the presidential action, but those who hoard items to sell with hiked up prices are, and may be subject to investigation.

“If you have a big supply of toilet paper in your house, this is not something you have to worry about, but if you are sitting on a warehouse with surgical masks, you’ll be hearing a knock on your door,” he said.

The Department of Health and Human Services (HHS) was granted the authority to determine which items are prohibited for sale in “unnecessary quantities” above the fair market value in light of the hoarding rules.

The measure aims to ensure that hospitals, first responders, and doctors have sufficient supplies of critical medical equipment, including personal protective equipment and sanitizing and disinfecting products.

“By limiting access to these critical resources, those who engage in hoarding and price gouging could put both our medical workers and the health of the American people at risk,” the White House said last month. “All Americans must come together to help one another during this time and help combat the outbreak.”

Today’s food supply chain crisis began in the meat industry has been developing for decades, and Tyson Foods has helped to create the disaster that is currently unfolding. 

The problem is consolidation, and with Tyson, JBS SA and Cargill Inc, three mega-corporations that control 66% of America’s beef, as much of it is processed in just a few dozen meatpacking facilities across the US. Only a few companies also dominate pork and Chicken. 

There have been at least 12 closures of meatpacking plants in April because of virus-related issues among employees. This has resulted in at least 25% of pork and 10% of beef processing capacity coming offline in the last several weeks, reported Bloomberg. 

“This is 100% a symptom of consolidation,” said Christopher Leonard, author of “The Meat Racket,” which examines the protein industry. “We don’t have a crisis of supply right now. We have a crisis in processing. And the virus is exposing the profound fragility that comes with this kind of consolidation.”

On Sunday, Tyson Foods warned in a full-page ad in the New York Times that the “food supply chain is breaking.”

“As pork, beef and chicken plants are being forced to close, even for short periods of time, millions of pounds of meat will disappear from the supply chain,” wrote Tyson Chairman John Tyson, patriarch of the company’s founding family, in a Tyson Foods website post that also ran as a full-page ad in several newspapers. “The food supply chain is breaking.”

Then on Tuesday, President Trump signed an order for meatpacking facilities to remain open during the pandemic. With plants being forced to stay open as the fast-spreading virus infects workers, that doesn’t necessarily mean workers will show up to work. We discussed that over the weekend in a piece titled “American Farms Cull Millions Of Chickens Amid Virus-Related Staff Shortages At Processing Plants.” 

The number of meatpacking plants across the country has declined by 70% since 1967, thanks mostly due to companies like Tyson and their rapid consolidation efforts to control the industry.

The pandemic has exposed the fragility of America’s food supply network, a victim of its own success via consolidation but now risks rapid food inflation that could anger tens of millions of Americans. 

And while the US could see food supply shortages in the coming weeks, Brazil’s JBS SA is coming to the rescue and stands ready to scale up exports of meat from Australia and Brazil to aid the US.

Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,

Contact Tracing? Really? That’s the next big government program to push for total surveillance over our lives. Now the real fallout from the Coronapocalypse comes to light.

The very people who created a fake pandemic out of faulty statistics, media fear-pimping and the rankest of propaganda are now pushing the total surveillance state to protect us (them?) from the next crisis.

James Corbett from the Corbett Report just published an excellent video discussing ‘contact tracing’ as promulgated by (who else?) the Clinton Global Initiative to create an army of new Brown Shirts to assist our wise and benevolent leaders in managing us like livestock.

James is urging us not to use their Orwellian term, and I agree with him. But the best way to do that is to make fun of it and them.

I propose just looking at them and saying, “Don’t Trace Me, Bro.”

As always when they want to herd us towards a terrible idea they first have to come up with a harmless sounding euphemism for it. Either that or just call it a war that we’re going to fight and win together, you know, for kids!

But this was always the plan with this virus. We can speculate as to why this has been done, why it was directed from the commanding heights of our society but, in the end, that speculation is irrelevant.

This is happening, it’s here and they are now working to square the circle. The goal is to finish off the last vestiges of anonymity and individuality started with the destruction of financial privacy during the Clinton Adminstration, which was wrapped in the classic government phrases “Know Your Customer” and “Anti-Money Laundering”

Now those sets of rules which got ramped up after 9/11 dominate the global financial landscape.

But, let’s look at what’s happened with COVID-19 step-by-step.

First, a virus shows up in China which people in the highest levels of our government were briefed about as early as November, if Pepe Escobar’s research is to be believed.

The gold standard remains the ABC News report according to which intel collected in November 2019 by the National Center for Medical Intelligence (NCMI), a subsidiary of the Pentagon’s Defense Intelligence Agency (DIA), was already warning about a new virulent contagion getting out of hand in Wuhan, based on “detailed analysis of intercepted communications and satellite imagery”.

An unnamed source told ABC, “analysts concluded it could be a cataclysmic event”, adding the intel was “briefed multiple times” to the DIA, the Pentagon’s Joint Chiefs of Staff, and even the White House.

Next China, the gold standard for the Orwellian Panopticon, proceeds to use that Panopticon to prove to the world how effective government can be in containing a deadly plague.

That model, which runs fundamentally counter to billions of years of evolution and basid immunology, is then propagated around the Western world to combat COVID-19, a disease which has a mortality rate similar to the annual flu, to shut down those economies exacerbating a financial crisis already fully underway.

This destroys the lives of hundreds of millions of people. It creates economic dislocations that make the Great Depression look like a mild recession.

In places like Italy, France and Spain where youth unemployment has been in double digits for more than a decade, the lock down was used as a way to tamp down social unrest, as they were hot beds for opposition to inept and increasingly fascistic governments.

In the U.S., a country ruled by old, ideologically-possessed and corrupt Boomers who have been in a heightened state of fear since Donald Trump was elected saw the opportunity to create the worst possible outcome in places like New York and California.

Governors in blue states seized power they didn’t legally have and cried for help they didn’t need.

And the confusion and disinformation about the virus created so much fear people willingly huddled in their homes hoping the angel of death passed them by with nothing more to do than be glued to the death counter in a desperate bid to stay informed about the science.

But there weren’t two million dead in the U.S. There’s around 50,000 and those death statistics are very speicous since the people reporting them have motive, means and opportunity to inflate them to get Federal aid, advance their political agendas now on full display and cover their asses.

So, now ‘contact tracing’ which is just a euphemism for total surveillance. But they are admitting that they can’t do it themselves. They need help. In totalitarian governments like the U.K., they’ll have an app in a couple of weeks.

Matthew Gould also disclosed plans to log the location of whenever two or more people are in close proximity for minutes at a time.

That will disturb privacy campaigners.

Ya think?

Mr Gould told the Science and Technology Committee the app would be “technically ready” for deployment in “two to three weeks” – but made it clear it was only one part of the strategy to emerge from lockdown and would involve a none-too-subtle marketing campaign.

“If you want to protect the NHS and stop it being overwhelmed and, at the same time, want to get the economy moving, then the app is going to be part of an essential part of a strategy for doing that,” he said.

China already has this. All across the enlightened West countries will now recruit tens of thousands of ‘contact tracers’ to go out and build their network for them, just like Gavin Newsome and Andrew Cuomo discussed with Bill Clinton in the video linked above.

And since there are now tens of millions of people out of work desperate for a job of any sort finding recruits will be easy.

See how this works?

First you destroy people’s lives, then you print trillions in funny money to bail out the inept and continue paying the enforcers, ensuring they are fed. And then when desperation reaches its peak you create a new government program and turn people into snitches to ensure compliance.

We’re going to empower the worst busybodies who are already insane with fear to run around collecting data for the government.

All in the name of getting the economy back up and running!

I’m pretty sure when I read The Scarlet Letter in high school we didn’t consider Hester Prynne to be the bad guy. Because the person who is COVID-19 positive will now have a big red “CV” on them which will limit their ability to partake in society.

The next stage will be to force them to lock themselves down in isolation or face the depredations of the State. And even if we begin to ignore such insanity the next step will be to look the other way when the contact tracers become belligerent.

This is all about keeping everyone in a heightened state of fear at all times. The Karens will bee worried about a stupid germ and everyone else will be worried about what the Karens will do.

Because what good is this app if it doesn’t report you to the authorities who know where you are.

So the solution to a virus and the incompetence of our governments is to turn busy bodies into brown shirts and COVID positives into social pariahs.

Do you realize what happens when you don’t pay a parking ticket now? Eventually your licence gets suspended, then your car insurance gets canceled. If you don’t turn your tag in for not having insurance then you are risking jail time when you get stopped by the police. They arrest you for driving on a suspended licence, impound your car, and the entire ordeal becomes a bureaucratic nightmare.

The moral of the story? Pay your parking ticket, obviously.

But not because you were a bad person or committed a heinous crime. But because you broke the rules. If you don’t follow the State’s rules, no matter how petty, no matter how asinine you will be punished to the full extent of the law.

Do you really think this ‘contact tracing’ system won’t end up in the same kind of hell?

Now you’re a documented threat to other people’s lives! You’re an evil spreader, man! Think of the children!

The State is only good at two things. Killing people and creating perverse incentives. And if this isn’t a classic case of creating the perverse incentive of destroying civilization in order to save it I don’t know what is?

This is the real danger of 5G technology. It isn’t China having a backdoor embedded by Huawei, it is the State having the ability to blanket the world in high bandwidth snooping devices everywhere that people congregate.

Their system is failing before our eyes. It’s a system born of corrupt money begetting ever greater institutional corruption. They wouldn’t be pushing for this total surveillance if they weren’t uniquely paranoid about our readiness to throw them overboard.

They want us snitching on each other and suspect of each other. This is the most pernicious form of social control ever devised, to distrust basic human contact and interaction because there are germs in the world.

It’s time to end the mass hallucination that we’ve never dealt with something like this before. The mass branding of this COVID-19 as the plague is laughable and the push for global surveillance is pathetic.

Unfortunately, we live in a world today where the fearful are empowered by the powerful to mob the non-compliant. COVID-19 isn’t the plague folks. If you think it’s the crisis you should be fearful of I urge you to seek therapy not the false security of a government tracking app.

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Two days ago, the WSJ’s Fed watchers Jon Hilsenrath and Nick Timiraraos started off their expose on how the “Fed Is Changing What It Means to Be a Central Bank” in which the only thing that really mattered was the first paragraph:

The Federal Reserve is redefining central banking. By lending widely to businesses, states and cities in its effort to insulate the U.S. economy from the coronavirus pandemic, it is breaking century-old taboos about who gets money from the central bank in a crisis, on what terms, and what risks it will take about getting that money back.

This is a good description of what the Fed has done in the past month: the breach of virtually every central bank taboo imaginable, crossing lines not even Ben Bernanke dared to cross, all in the pursuit of stabilizing the US economy and avoiding a full-blown depression, even if it meant institutionalizing moral hazard as the only imperative and ending free and capital markets as we know them, resulting in “markets by decree.” It also propelled the Fed’s balance sheet to a record $6.6 trillion, well on its way to hitting $12 trillion, or half of US GDP.

Commenting on the Fed’s recent unprecedented step, Standard Chartered’s Steve Englander writes that the Fed’s absolute  priority is preventing financial market stress from escalating, and will do anything it needs to achieve this goal, even as major policy moves as made inbetween meetings.

Which brings us to today’s FOMC meeting, where with markets decidedly calmer, and the S&P about 10% below its all time highs even as the US economy remains effectively frozen, Englander does not expect big policy decisions at Wednesday’s FOMC. After all, with rates at zero and QE already “unlimited” what can the Fed do absent announcing negative rates and starting to buy stocks (it will likely pursue both, but it first needs another market crash.)

In terms of what the Fed will do today:

• The FOMC will likely raise the IOER by at least 5bps, according to Englander, to push effective fed funds a bit further from the zero bound. Looking further down the road, Englander expects some form of YCC but not on Wednesday. The big medium-term questions are how to deal with ballooning deficits and how much credit risk to take on. Powell will likely adopt a market friendly tone, but couch policy in conventional terms. 
• Saxobank agrees and expects Powell to “explain the why, the what and the how of the latest Fed’s monetary policy tweak”, while also not anticipating any monetary policy change. And since a rate cut is out of the box, with rates already at the lower bound –Powell could also rule out negative rates once again, which could be met with strong market disappointment.
• It is unlikely that Powell will provide strong guidance on the path of interest rates or discuss extensively the future of QE or the Fed’s credit support programs, especially the Main Street lending program. It is certainly too early to have details. At best, Powell could give the market a hint on how the central bank sees the recovery and could allude to a target of unemployment rate as a pre-condition for monetary policy normalization.
• Regarding recent market developments, especially oil prices turning negative, the Fed should downplay risk of outright deflation in the United States and indicate the recent volatility observed in the oil markets is seen as transitory by the committee.
• To sum up, today’s press conference is essentially a confidence game during which the Fed will continue to repeat almost every minute its readiness to act as appropriate to offset the current crisis and avoid a market crash, which implies a dovish statement on the Fed ballooning balance sheet.

* * *

The bottom line is that, besides some technical adjustments, what the Fed does from now on will have very limited impact, and in fact having gone “nuclear”, the risk is that an economic recovery will force the Fed to unwind some if not all of the emergency measures implemented in recent weeks, leading to the next destabilization event in the market.

With that said, here is a preview of today’s FOMC meeting, where as Steven Englander predicts, the “Difficult questions are likely to be avoided.“

A pause to see what is working and what is not

Federal Reserve policy makers have been sleeping above the shop in recent weeks, conducting monetary and financial policy almost in real time. As such, no big policy decisions are likely to be made at the 28-29 April meeting, given the policies already implemented; but some adjustments will likely be made to existing policies. The FOMC will probably want to use the six weeks between this meeting and the 9-10 June meeting to assess the effectiveness of already announced policies and the likely recovery path of the economy.

The FOMC will be circumspect in discussing larger structural issues both at the meeting and the press conference. Ensuring that the Federal government’s path remains sustainable as it uses fiscal policy to stabilize activity will likely become a key Fed priority. The Fed may also need to absorb more credit risk, as vulnerable segments of financial markets are identified. Problems could emerge among mortgage servicers, commercial real estate firms, state and local governments, non-profits, and weak EM borrowers.

Fed Chair Powell will likely stress the Fed’s ability and willingness to support activity and asset markets without providing specifics. On balance, he is likely to provide an asset-market-friendly message, because there is no benefit in doing otherwise. With little visibility on an economic rebound, the FOMC’s incentives are to talk up its ability and willingness act, even if no short-term moves are likely.

What might the FOMC do?

• Push the IOER higher?

This is the most likely move and the FOMC will likely be at pains to characterize this as a technical move. Effective fed funds have been trading below 5bps in recent days; pushing the interest on effective reserves (IOER) higher by 5bps could enable fed funds to trade closer to the mid-point of the 0-25bps range. A 5bps move is unlikely to alarm asset markets, but highlights the abundant liquidity in parts of money markets and elevated spreads elsewhere. Nudging up the IOER reduces the risk of negative fed funds rates and averts accusations that the Fed is introducing negative rates through the back door. The FOMC may keep the IOER steady, if fed funds trade closer to 10bps in coming days, but the base case is a move higher.

• Adjustments to the CPFF and PPPLF

Take-up of the Paycheck Protection Program Liquidity Facility (PPPLF) has been c. USD 8bn so far. The Commercial Paper Funding Facility (CPFF) has lent out c. USD 2.7bn, the Money Market Mutual Fund Liquidity Facility (MMFLF) is below USD 50bn. These levels are very likely lower than the Fed expected.

The latest data are for the week ended 22 April, so if volumes have not ramped up significantly, the Fed may adjust terms to make them more attractive to lenders and borrowers. On balance, the FOMC will announce an alteration of terms if the Fed is convinced that the programs will not gain traction in their current form, but from its perspective, waiting a few days or weeks is not costly.

What won’t the FOMC do?

• Monetary policy framework issues put aside

The two issues we see as major framework issues are credit risk and monetization. For now the Fed will keep policies within a normal monetary policy framework, even if the FOMC recognizes the heavy monetization component implied by its policies. There is a point at which fiscal sustainability becomes a direct objective of monetary policy, but the FOMC probably does not see the economy there yet.

Monetisation can be regarded as ‘helicopter money’ to the fiscal authority. Taking on private-sector credit risk can be seen as a form of helicopter money for private- sector borrowers. It may be more effective to act directly on private-sector yields, including taking on credit risk to below-prime borrowers, if spreads between private-sector borrowing rates and US Treasuries are too wide. We doubt that the Fed wants to address this issue head-on right now. It may do so if conditions deteriorate in the weaker parts of credit markets, but so far, we do not think it sees the need.

• Expanded program for non-profits and state and local governments

The same credit risk issues apply to non-profits and state and local borrowers. Many were in soft fiscal positions before the crisis, and face extended revenue losses. There may have to be a separate congressional allocation to backstop Fed lending to such borrowers in difficult credit positions. We do not expect any concrete announcements at the upcoming FOMC meeting.

The Fed has already indicated that it will broaden eligibility for municipal borrowers, and introduce a facility for non-profits. There may be some indication at this meeting of the eligibility changes for municipalities and terms for non-profits, but we expect any such announcement to have limited impact. Questions on other weak credit segments of credit markets will probably be acknowledged, but not addressed.

Secretary of State Mike Pompeo blasted China on Wednesday, telling Fox News that the their ongoing efforts to hide information about the origin of the coronavirus poses a threat to the world.

“The Chinese Communist Party now has a responsibility to tell the world how this pandemic got out of China and all across the world, causing such global economic devastation,” said Pompeo, adding “America needs to hold them accountable.“

White House adviser Jared Kushner, Trump’s son-in-law, also said Wednesday that Trump has ordered an investigation into the origins of the virus and hold those responsible accountable for its spread, reports Bloomberg.

(Might that include Dr. Anthony Fauci, who heads the National Institute for Alergy and Infectious Diseases which committed $3.7 million over six years to Wuhan scientists studying bat coronaviruses, according to Newsweek?)

Pompeo’s comments follow a Wednesday claim on China Central Television’s top evening news program suggested that US data on COVID-19 infections was inaccurate and misleading, while the program in recent days accused Pompeo of “turning himself into the common enemy of mankind” and “has exceeded the bottom line of being human.”

“The Chinese Communist Party now has the responsibility to tell the world how the pandemic got out of China and all across the world, costing such global economic devastation.” – @SecPompeo pic.twitter.com/kH2cSha703

— Ronna McDaniel (@GOPChairwoman) April 29, 2020

According to Pompeo, China knows that the pandemic started in their country, and is using “classic communist disinformation” to shift blame.

“I’ve been heartened to see Australia, other countries joining us, demanding an investigation, because while we know this started in Wuhan, China, we don’t yet know from where it started,” he said, walking back a claim made last week when stated “Look, we know it began at one [lab], but we need to figure this out.”

“And in spite of our best efforts to get experts on the ground, they continue to try and hide and obfuscate,” Pompeo added.

Meanwhile, Kushner told Fox News in a separate Wednesday interview that Trump “has asked the team to look into, very carefully, what happened, how this got here, and to make sure that he will take whatever actions that are necessary to make sure the people who caused the problems are held accountable for it.”