by P.J. DiNuzzo April 15, 2020
I think most of us have been a bit underwhelmed by the CARES Act support of working families and people who have been simultaneously furloughed and taken off their corporate health insurance. But you should know that the U.S. Federal Reserve Board has been very serious about making sure larger corporations are being supported during this pandemic crisis. On Thursday, the Fed announced a $2.3 trillion package of stimulus measures into various distressed corners of the U.S. economy. This, of course, is on top of trillions of dollars that it pledged a couple of weeks ago to buy Treasury bonds and home mortgage loans, and lend to banks (and through banks, to companies) at zero interest rates.
All of this comes in addition to the Treasury Department’s announcement, the same day, that it would provide billions more to states, cities and counties so they can continue to provide essential services during the pandemic.
The Fed’s stimulus package has already helped support the stock and bond markets. A total of $500 billion will go toward the purchase of municipal bonds, including low-rated debt, in order to stabilize those markets and ensure that even companies whose bonds are downgraded won’t face higher interest costs. Other monies have been set aside to provide low-interest loans to businesses that don’t qualify for the Small Business Administration’s emergency loans—companies with fewer than 10,000 workers or revenues of less than $2.5 billion.
The simplest way to look at the situation is to imagine the federal government as a squad of firemen, who have turned on a hose and are spraying money in every direction in Corporate America and toward any investment market that seems to be showing signs of instability. Some have argued that corporations should be allowed to fail and restructure themselves to be leaner and more efficient, and that markets like lower-grade (sometimes called “junk”) bonds should be allowed to sort themselves out on their own. But those voices are clearly not running the government at the moment; the Treasury Department, the Fed and many members of Congress seem to be primarily concerned with supporting our capital markets.
P.J. DiNuzzo, CPA, PFS™, AIF®, MBA, MSTx
President, Founder, and Chief Investment Officer