FOMC playbook: the only new game in town?

IN LIGHT of the Covid-19 pandemic, the Federal Open Market Committee (FOMC), while taking more aggressive actions, seems to have stuck more or less to the standard playbook of responding to "unusual and exigent circumstances".

This essentially calls for slashing conventional policy rates to their effective lower bound, accompanied by forward guidance, embarking on asset purchases, rolling out emergency liquidity facilities and experimenting with lending programmes. But policymakers, with the required US Treasury backstop, have also introduced more creative programmes to encourage credit extension and reached into different market segments. Consequently, some believe that the Fed has overstretched in the current environment by seemingly protecting against credit and default risks. Nonetheless, Fed chair Jerome Powell has repeatedly underscored that the Fed is merely harnessing its "lending powers and not spending powers". Hence, the more novel "Corporate Credit Facilities", "Main Street" lending programmes and liquidity facility to support municipal debt, all of which backstopped by the Treasury, are intended to lend - as Mr Powell alluded to - "forcefully, proactively and aggressively" in the current backdrop.

The asset-side of the Fed balance sheet (as of early June) has ballooned by more than US$2.8 trillion, mainly as a result of the announced measures, totalling above US$7 trillion and growing, exceeding the prior peak of around US$4.5 trillion. Cumulatively, both asset purchases (more than 77 per cent of the rise) and central bank liquidity swaps (greater than 16 per cent) account for the bulk of the increase so far. Lately, however, the daily pace of expansion in the balance sheet (for the full range of tools) has slowed to around US$5 billion from the earlier run-rate of roughly US$20 billion. Basically, as market functioning improves, purchases scale down.