MNI EXCLUSIVE: Ex-Fed Officials See Zero Rates, QE Next Week

--FOMC Likely To Add Other Liquidity Tools, Swap Lines

By Evan Ryser and Jean Yung

     WASHINGTON (MNI) - The Federal Reserve will likely cut its policy rate to

the zero lower bound at next week's meeting if not sooner, inject further

liquidity and provide a backstop to markets during the COVID-19 threat, former

officials told MNI.

     Former Atlanta Fed President Dennis Lockhart told MNI Friday he now expects

"the FOMC to cut all the way to zero next Wednesday. I believe they are

recognizing the profound uncertainty associated with the course of the

coronavirus and its effect on the U.S. economy."

     Former Treasury Department official and Fed economist Nathan Sheets said

Friday, "When I see the tone and the commitment of the Powell Fed I think that

they are taking out that playbook from the global financial crisis," noting that

rates will be cut to zero Wednesday if not earlier. 

     Steven Friedman, former director of market analysis at the New York Fed,

said the economy is already likely in a recession and the Fed will cut rates to

zero. 

     The former officials' views evolved quickly this week, with some just two

days ago seeing a need for 50bps in cuts. The Fed rate cut would be 100bps to a

federal funds rate range of 0% to 0.25%. The FOMC voted unanimously March 3 to

lower the rate by 50bps to a range of 1% to 1.25%, the first intermeeting cut

since the 2008 financial crisis.

     Increased odds of a global slowdown in addition to strains in the bond

market have pushed the Fed to inject USD1.5 trillion and accelerate planned bond

purchases on Friday. Some former officials say it's not enough.

     Sheets said: "Liquidity is nice but we need more than just liquidity right

now."

     Recent Fed moves show a greater commitment to act further including moving

rates to zero, comfort in beginning QE, and an opening of 13(3) targeted lending

facilities.

     Friedman, now at MacKay Shields, said Friday the Fed could model future QE

after QE3 from 2012 and commit to a flow potentially at USD60 billion per month

until some condition is met. That approach is tricky since the macro picture

still looks good and data is lagged.

     Sheets suggested that the Fed bring back tools known by a legal clause of

13(3) that were rolled out during the 2008 financial crisis, such as the Term

Auction Facility or the Term Asset-Backed Securities Loan Facility. That would

require the Treasury Department to declare "exigent circumstances."

     Friday morning Treasury Secretary Steven Mnuchin said on CNBC that there

will be liquidity available. "Whatever we need to do, whatever the Fed needs to

do, whatever Congress needs to do, we will provide liquidity," he said.

     Sheets said if the Fed can't roll new backstops out fast enough officials

can indicate they are working on them. 

     "Something they could do fairly easily, they could reactivate the swap

lines getting dollar liquidity flowing not only in the United States but

abroad," Sheets said. "Dollar stresses are not extreme like it was in 2008, but

you may want these facilities up preemptively."

     Lockhart said in these circumstances the Fed is wise to act without delay,

to use their tools to the full extent, and to support financial markets and the

broad economy. "In the committee's communication next week the committee may

amplify the Fed Funds rate cut with forward guidance to the effect that the

policy rate will remain at zero until the outlook becomes more clear and

improves," he said.

     "This is likely to be a very momentous meeting for Jay Powell and his

colleagues next week," Sheets said.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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