MNI INTERVIEW: Fed Might Still Need Term Auction Facility

--Asset Buys Should Help Treasury Market Function: Ex-Fed Offc'l English

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve's unprecedented effort to address

alarming signs of disfunction in the bond market might not be enough, although

the latest package of measures seeking to counter the COVID-19 threat is a

vigorous response, former Fed official William English told MNI.

     The Fed Sunday slashed its target range for the fed funds rate by 100 basis

points to its effective lower bound of 0% to 0.25%. The Fed also announced

internationally coordinated dollar swap lines, changes to the discount window,

and purchases of USD500 billion of Treasuries and USD200 billion of MBS, in

order to support market functioning for those securities.

     "The situation demanded a very vigorous response so they went straight to

zero" although the dampening effects of the coronavirus will remain, which the

Fed can't do much to counteract, English said, a former senior Fed Board

economist who now teaches at Yale University. 

     But the asset purchases, to be conducted over coming months, "should indeed

help with the functioning in the Treasury market."

     "That was a big step in USD700 billion. Just in terms of dollars that's

more than QE2, that's more than the maturity extension program," English said.

     --DURATION

     "They're buying across the curve," English said. "They're not buying

particularly at the long end. It's not quite the same as what they were doing to

try to take duration out of the market [after the financial crisis] and push

down long rates."

     "The focus is a bit more now on simply getting market functioning improved

so that the spreads are narrower and flows are better and the market's

functioning better so that firms can adjust their positions in a way that's much

more manageable."

     The Fed lowered the overnight reverse repurchase rate to 0%, interest rate

paid on required and excess reserve balances to 0.10%, and the discount window's

primary credit rate to 0.25%, where in the past there has been a 50bps spread

between the top of the fed funds range and the primary credit rate.

     "The liquidity provision was pretty striking," English said. "That's a very

narrow spread of the discount rate over market rates and willing to lend up to

90 days for renewal by the borrower. That's certainly making the discount window

a more attractive source of finance."

     --STIGMA

     But stigma "probably will be" an issue, he said, noting it was "tough to

deal with that."

     The problem the Fed faces is that borrowers are afraid using it will be

seen as a sign that they are weak, English said, and in that case people will

pull away.

     "By making the rate lower you make it less stigmatized," he said. But if

the Fed continues to see problems with funding markets and the discount window

isn't being utilized "then they may well go back to using the [Term Auction

Facility] or something similar to the TAF."

     Setting up the TAF wouldn't require a change in regulation and could take a

matter of days, he said. "They just have to tell their reserve banks go -- and

the reserve banks have to do it."

     We should know "relatively soon" whether the discount window is being

effective in providing liquidity, English said.

     --SECTION 13(3)

     Fed Chair Powell, asked about the Fed's powers under section 13(3) of the

Federal Reserve Act, the basis for crisis-era facilities such as the Commercial

Paper Funding Facility and the Term Asset-Backed Securities Loan Facility, said

Sunday, "We have nothing to announce on 13(3) powers, but that's part of our

playbook in any situation like this."

     English said: "That step is a much bigger step to go into the 13(3)

emergency lending world ... The decision to do that would be a tougher one, but

that's available. It's something that they could do."

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

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