Fed predicted to purchase USD1.5 trillion in Treasuries over the remainder of 2020

David Mann, head of capital markets, global ETFs at Franklin Templeton, has commented further after last week’s announcement from the Federal Reserve on supporting the US bond market.

David Mann, head of capital markets, global ETFs at Franklin Templeton, has commented further after last week’s announcement from the Federal Reserve on supporting the US bond market.

“The Fed reiterated that they are on standby to act as needed to help maintain stability in the markets.  From an ETF perspective, it appears that the potential of the Fed purchasing fixed income ETFs is still a very real possibility which means we have not seen any unwinding of the flows those funds have seen over the past month,” Mann says.

• Franklin Templeton comments on Fed’s purchase of investment grade bond ETFs

Aberdeen Standard Investments Senior Global Economist James McCann also commented on the Fed’s statement, saying: “There’s nothing new in this announcement. The Fed is highlighting all the work it’s doing to support the economy and promising to do more if necessary. It’s sensible that the Fed takes a brief pause to establish the impact of what they’ve already done. But they cannot afford to rest on their laurels.

“Currently the Fed is essentially pushing harder on the same old levers. We know from the financial crisis that those levers aren’t enough to bring about the sustainable growth, inflation and higher rates that everyone wants.

“The Fed needs to be bolder. Its first step should be to increase the scale and scope of its credit easing measures to ensure that liquidity flows to those parts of the economy facing a crunch.

“It also needs to innovate and helicopter money should be on the table. What’s being considered at the moment isn’t genuine helicopter money because the measures being proposed to fund fiscal efforts are not permanent. That’s a crucial difference. By making them permanent the Fed could powerfully boost growth and inflation, in a way that’s unlikely to happen if they just stick to the same old tools. If done properly, the Fed can avoid losing the independence that it worries would happen by adopting helicopter money. But the first step to making a change is accepting the need to change, and that’s where the Fed’s problems start.”

Over at Blackrock, Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, who is also Co-Manager of the BlackRock Fixed Income Global Opportunities fund and BGF Global Bond Income fund says:  “The overarching theme of [last week’s] FOMC statement and press conference was that the Fed is committed to doing ‘whatever it takes,’ and more, just to make sure as strong as possible a recovery can be reestablished.

“As such, it’s abundantly clear from [last week’s] FOMC statement and press conference that this represents Chair Powell’s ‘Mario Draghi Moment’ where like the former President of the ECB, he’s effectively committed to ‘do whatever it takes’ to aid the economy through this severe stress.

“[The] meeting was also an opportunity to begin laying out the transition from emergency support of market functioning to a longer-term asset purchase regime.

“Other than potentially laying out an average inflation targeting goal later this year, the Committee can maintain a highly credible ‘whatever it takes’ stance without needing to hew to a set of pre-determined quantitative goals.

“Our expectation is that the Fed will purchase roughly equivalent to at least USD1.5 trillion in Treasuries over the remainder of the year (~USD200 billion per month).

“With asset purchasing in roughly these amounts, as well as everything the Fed has already done, the magnitude of the policy response to this economic crisis is simply stunning.

“In fact, by year end, we anticipate the Fed’s balance sheet will have grown by a staggering USD7 trillion in an effort to deal with the fallout of the Coronavirus Crisis, or a pace of nearly USD26 billion per day over a 270-day window.

“For context, this equates to near one third of U.S. GDP, or looked at differently, Fed purchases through year-end will amount to near 28 per cent of the S&P 500 Index market capitalisation or 20 per cent of the US Aggregate Bond Index.”