MNI INTERVIEW: Fed May Launch Crisis-Lending Plan: Ex-Staff

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve is likely to soon announce some kind

of special emergency lending facility to ease a credit crunch that's looming as

the coronavirus outbreak stretches companies and banks, a former Fed economist

told MNI.  

     Many firms with high credit ratings already had shaky finances and the

focus now is on what kind of special lending facility is established according

to Danielle DiMartino Booth, a long time adviser to ex-Dallas Fed President

Richard Fisher.

     "It's going to happen, and it's going to happen fairly quickly," she said

in an interview late Monday, saying the program would likely be managed by the

New York Fed, which deals directly with Wall Street. The ultimate scope of any

lending facility will depend on how the credit outlook evolves and where the

troubles prove most acute, she said.

     "A lot of these companies, if we go into a recession, are just toast.

They're not going to be able to service all that debt," she said.

     "It's Wall Street's worst-kept secret: a big chunk of the high grade market

is junk," referring to the two major classes of debt as defined by the three

major credit rating firms. The distinction is key because some large investors

like pensions and money-market funds can only hold "high-" or "investment" grade

bonds.

     --CORPORATE BONDS

     Responding to this crisis is hampered by the Fed's lack of legal authority

to purchase corporate bonds directly, which DiMartino Booth said policymakers

investigated during the 2008 financial crisis. Boston Fed President Eric

Rosengren said last week this policy constraint might need to be revisited.

     The Fed in 2008 was able to target bond purchases on housing because Fannie

Mae and Freddie Mac were quasi-government entities, DiMartino Booth said. This

time it's different because the industry facing trouble is energy amid some of

the biggest price drops in decades and companies bearing heavy debt loads. 

     "It's going to be a big shock to the system because we know that energy was

just the first domino to fall," DiMartino Booth said. 

     "The trade war [forced firms] to put in place layoff plans" that were

called off after the apparent truce between the U.S. and China, she said. "With

this extra shock, they're going to proceed with the layoffs."

     --BEYOND ENERGY

     These will extend well outside the energy sector, DiMartino Booth added.

"If people are afraid to leave their homes, the service sector will really get

hit."

     Further interest-rate cuts from the Fed following last week's surprise half

point reduction are academic at this point, she said. Many investors already

anticipate another 50bp cut later this month. 

     "The working assumption is that we are already at the zero lower bound,"

DiMartino Booth said.

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

[TOPICS: MMUFE$,M$U$$$,MC$$$$,MI$$$$,MK$$$$,MT$$$$,MX$$$$,M$$CR$,M$$FI$,MFU$$$]