Intercession of Fed Brings Some Calm to Rocky Markets

Federal Reserve Chairman Jerome Powell testified virtually Tuesday before the Senate Banking Committee. (Courthouse News image)

MANHATTAN (CN) — Even after a volatile trading session in which stocks dropped after a huge opening, Wall Street finished on a positive note.

The Dow Jones Industrial Average gained 526 points for the day, a 2% increase, while the S&P 500 and Nasdaq both gained a hair under 2%.

Markets were largely boosted by recent actions by the Federal Reserve, which unveiled its much-anticipated Main Street Lending Program and a new liquidity facility to purchase corporate bonds. 

The new liquidity facilities raised eyebrows among some experts, who think they may be unnecessary given Wall Street’s general strength. For Federal Reserve Chairman Jerome Powell, however, the U.S. economy is not out of the woods yet despite evidence in jobs numbers of a “modest rebound.”

“There are parts of the economy that will struggle to return to their old ways of activity because they involve getting people together closely in large groups,” Powell told the Senate Banking Committee on Tuesday. “It’s all quite uncertain, but we appear to be entering that second phase of the economy reopening and businesses reopening.”

Powell said the central bank would start buying up corporate bonds as a backstop to preserve markets.

The Federal Reserve announced on Monday it would purchase up to $750 billion in individual corporate bonds on the secondary market. Bond issuers must be rated BBB- or better prior to March 22, when lockdowns caused many companies to shutter.

Some experts are leery, however, about the Fed buying up corporate paper.

Pennsylvania Senator Pat Toomey worried about potential mission creep at the Fed, noting the corporate bond market is functioning well. 

“Those needs are being met, and I worry it starts to look like fiscal policy, or it starts to look a lot like the goal is to lower spreads, despite the fact that nominal rates are incredibly low,” the Republican Toomey said. “We run the risk that we diminish price signals that we get from the corporate bond market, which can be extremely important in enabling us to detect problems.”

Powell noted the Fed had pledged to get into the corporate bond market back in March, and that it is not increasing the dollar volume of purchases, merely shifting indexes.

“It’s out of an excess of caution to preserve these gains for market function by following through,” Powell said. “I don’t see us wanting to run through the bond market like an elephant, snuffing out price signals, things like that.”

He added that, “if market function continues to improve, we’re happy to slow or even stop the purchases. If it goes the other way, we’ll increase.”

Powell also again indicated he hopes Capitol Hill takes up additional fiscal measures to shore up the economy, echoing comments from his predecessors Ben Bernanke and Janet Yellen.

Along with 130 top economists, Bernanke and Yellen sent a letter on Tuesday, calling on Congress to pass additional relief measures before the support provided in the CARES Act expires later this summer. Failure to do so risks “potentially disastrous budget shortfalls” in states and local governments, the economists warn.

“Insufficiently bold congressional policy responses to the Great Recession unnecessarily prolonged suffering and stunted economic growth,” the letter states. “Congress should not make this mistake again.” 

Others on Wall Street also think Congress needs to act, and soon. Top analysts at Goldman Sachs led by Jan Hatzius wrote on Monday night that disposable income threatens to drop significantly next year without further stimulus.

“Barring congressional extension of fiscal support well into 2021 — or an even sharper normalization of the jobless rate than we or consensus expect — consumer spending could therefore pose a significant risk to the budding recovery in the quarters ahead following the election,” they wrote.

Powell is scheduled to appear to testify on Wednesday before the House Financial Services Committee.

Last week marked huge swings in the markets, with U.S. exchanges on Thursday posting their worst day since state lockdowns took hold in mid-March. On Friday, Wall Street swung back into positive territory with mild gains. 

Investors have become increasingly rattled as health officials state the growing likelihood of an upswing in the Covid-19 pandemic. More than 100,000 new cases of the virus have been reported each day since May 27.

More than 8 million people have been infected by Covid-19 worldwide, while about 438,000 have died, according to data compiled by Johns Hopkins University. In the United States, 2.1 million people have contracted Covid-19, while more than 116,000 have died.

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