Never bet against the Fed. That’s the slogan passed down from investor to investor since Paul Volcker strangled inflation in the 1980s. Never bet against the Fed. It bears repeating. 2020 saw the largest and swiftest response to an economic dislocation in American history. Was that a surprise? No. Of course not. After the 2008 crisis one doctrine of monetary policy clearly stood out. Move big and move fast. Overwhelm the market with capital and confidence. Clearly that’s how the Fed responded in March and April of 2020 to the market turmoil from COVID-19.
In the span of weeks the Fed stepped up and stepped in. Cut rates. Then came facilities for short-term funding markets; commercial paper, primary dealer, and money markets facilities. Cash equivalents need to be protected. By April the Fed announced plans for buying corporate debt in the primary and secondary markets. Surprising for some but if you had been listening to Janet Yellen and Ben Bernanke this would have been an obvious move. The retired duo championed the move in the preceding weeks and the Fed itself had spoken at large about issues in the corporate bond market well before the pandemic.
The Paycheck Protection Program or “PPP” has received a lot of discussion around saving small businesses and maybe it will. Yet the Fed is just not equipped to deal with these types of assets. Small business loans/grants? Few Central bankers will say that’s the role they should be playing. So what should we do? In an effort to expand the discussion on structural solutions to current and future problems, a few ideas will follow.