MNI EXCLUSIVE: Fed May Build New Tools From Unspent USD260B

By Pedro Nicolaci da Costa and Jean Yung

     WASHINGTON (MNI) - The Fed is leaving the door open to additional credit

market supports by not specifying how it will use USD260 billion of the USD454

billion in Treasury funds allotted for corporate and municipal bonds.

     This gives a central bank seen as running out of ammunition room to aid

markets further amid the coronavirus pandemic, current and former Fed officials

say.

     "The Fed has been rather pointedly silent about what their plans are for

that 260 billion dollars-- it seems to me that's very smart," David Wilcox, the

Fed board's ex-chief economist, told MNI in an interview.

     Wilcox, now a senior fellow at the Peterson Institute for International

Economics, said the Fed could use the money to increase the lending potential of

existing programs, to cover losses on assets it acquires, or to fund new

facilities.

     Comments to reporters from St. Louis Fed President James Bullard, who held

a press call on Friday, suggested the move was strategic.

     --USEFUL AMMO

     The additional lending capacity "is useful ammunition because the crisis

could unfold in ways we can't predict," Bullard said. He pushed back against

market hopes for direct central bank purchases of equity ETFs. An intervention

in the stock market was "very unlikely" despite the Fed's moves into corporate

and municipal debt, he said.

     The Fed's rate cuts to around zero and a string of emergency lending

programs have helped market sentiment, but there are still troubles in

short-term funding markets including elevated interbank lending costs.

     Bullard expects a solid second-half rebound after what he described as an

historic  mandated shutdown that has seen over 20 million Americans apply for

unemployment insurance in four weeks.

     --BACK POCKET

     The Fed's policy response from here hinges on the ability of the health

authorities to get a grip on the pandemic, making it wise for policymakers to

keep their options open.

     "You always want to keep a little back-pocket to adjust across the

programs," said Nellie Liang, former director of the Fed's Division of Financial

Stability. "It's just appropriate risk management, you put out some facilities,

you see how they're working, where the needs are greatest," the Brookings

Institution fellow told MNI.

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta.ext@marketnews.com

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

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