Fed’s Targeted QE Keeps Credit Markets Under Full Control

<p>Despite positive developments in the US economy since the start of lifting lockdowns, Fed Chairman Jeremy Powell reiterated his dismal warning on Monday: extraordinary uncertainty reigns in the prospects for economic recovery. This uncertainty is generated mainly by the fact that economic projections strongly depend on the success of pandemic suppression and the government’s readiness to lend helping hand again in the form of new fiscal injections.</p>
<p>Powell’s statement, in fact, carries a call for taking signals of a second virus outbreak in earnest, but recent explosive growth in the number of new cases in some US states last week failed to convince bulls to ease grip. Optimism, as we see, triumphed after a slight hitch at the start of trading session on Monday: European and American indices closed in green, although the threat of new partial lockdowns in the US loomed on the horizon.</p>
<p>Analysts at Morgan Stanley said that despite the fact that the threat of a second outbreak exists, governments are more attuned to it compared with the first outbreak, they also realized the full power of fiscal “bazooka”, and the Fed, demonstrating unlimited depth of its balance sheet, leaves no chance for development of a credit crisis.<br />
The Fed really hands out credit guarantees on every US credit market, announcing various credit facilities.</p>
<p><img class="alignnone size-full wp-image-46232" src="http://blog.tickmill.com/wp-content/uploads/2020/06/1-27.png" alt="" width="585" height="243" srcset="https://blog.tickmill.com/wp-content/uploads/2020/06/1-27.png 585w, https://blog.tickmill.com/wp-content/uploads/2020/06/1-27-300×125.png 300w" sizes="(max-width: 585px) 100vw, 585px" /></p>
<p>Basically, they are all a kind of a targeted QE – depressing interest rates on the markets where the risk of their outbreak (and subsequent spillover to other credit markets if the state is fragile). It should be noted that the program of direct lending of the Fed to small and medium enterprises has not yet been enacted (the so-called Main Street Credit Facility). The program itself is a powerful signal that interest rates for these borrowers will remain at an acceptable level (as well as the market value of their debts), which should stimulate banks to expand lending to this group of lenders.</p>
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