Cumberland Advisors Market Commentary – More on Fed Liquidity and Lending Programs

Author: Robert Eisenbeis, Ph.D., Post Date: July 10, 2020
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The Federal Reserve continues to support financial markets, including the commercial paper market, the repo market, the municipal securities market, money market mutual funds, central bank liquidity swaps, and primary dealers. This is in addition to the usual discount window facility that provides credit to commercial banks.

Market Commentary - Cumberland Advisors - More on Fed Liquidity and Lending Programs (Eisenbeis)

In many cases there are either published maximums for these facilities, or they are essentially open-ended. In addition, in several instances the US Treasury has provided capital to cushion the lending facilities against losses. The following chart shows what we know to date about nine of these facilities and the extent to which they have actually been used as compared with the maximum sizes of the facilities where relevant.

As of July 1, the total amount outstanding for these programs was about $284 billion, of which $179 billion was due to the central bank liquidity swap program, leaving the other eight programs with a total of about $105 billion. This amount compares with Treasury capital contributions of about $111 billion. These numbers are minuscule compared with the potential outstanding volumes that even one of these programs could reach.

Constructing a time series for these programs since their inception has been complicated by the fact that until the last month the Federal Reserve provided data only on the net volumes in these facilities, and only some of the needed detail on actual loan volumes (as distinct from Treasury capital contributions) was available, buried in supplementary tables in the Fed’s H.4.1 report.

The graph above shows how the programs have evolved over time. The Paycheck Protection Program (blue) has grown in importance while the Money Market Mutual Fund Liquidity Facility (red) has declined significantly. Finally, the Corporate Credit Facility (yellow) has remained relatively constant between $35 and $40 billion since it was instituted at the end of May. These programs are small compared to central bank liquidity swaps, which have declined by over 50% from their peak in the middle of June.

The bottom line is that the emergency lending programs seem to be declining in importance, which raises questions about exit strategies and the possible knock-on effects down the road when it comes to using the Fed’s balance sheet for policy purposes outside the normal monetary policy path.

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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