What can the Fed do to help Main Street, not Wall Street?

Martha C. White

The markets continued their downward trajectory Monday in spite of a sweeping pledge from the Federal Reserve to support the economy as coronavirus shutdowns accelerated around the country. With consumer spending crippled by "stay at home" orders, many workplaces shuttered and an increasing number of employees laid off, the Fed's unprecedented intervention was still not enough to hold off another market plunge.

"The Fed is doing as much as it can," said Sam Stovall, chief investment strategist at CFRA Research. "You need large corporations, you need small businesses and you need individuals to be addressed."

The central bank previously announced that it would purchase $500 billion in Treasurys and $200 billion worth of mortgage-backed securities, and its new plans go well beyond those steps. It reaffirmed a commitment — this time, an open-ended one — to those two categories.

The Fed's Federal Open Market Committee also announced plans Monday for an operation it dubbed the Term Asset-Backed Securities Loan Facility, the goal of which it said was "to support the flow of credit to consumers and businesses," as well as plans to establish a Main Street Business Lending Program to support what it termed "eligible small-and-medium sized businesses."

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But in its current structure, there is little indication that the Fed can reach out and touch the individual households and mom-and-pop businesses that are facing potentially catastrophic cash crunches.

"None of these facilities does anything directly for households or small businesses," said Karen Shaw Petrou, managing partner of the consulting firm Federal Financial Analytics. Even the pledge to support Main Street businesses would fall short for many, because eligibility would depend on having an investment-grade rating. "Small businesses aren't rated by anybody," she said. "It's not helping where the hurt is the greatest."

Mark Hamrick, senior economic analyst for Bankrate, said: "It's important to remember that consumers are the lifeblood of the economy and consumers inevitably draw their income from work. If work is drying up, then we have a real problem. Really, what we have in our economy right now is an issue of solvency."

The central bank also announced provisions to help ensure liquidity across market sectors, even in traditionally "safe" areas such as municipal bonds. "There was massive dislocation in interest rates," said Andrew Smith, chief investment officer at Delos Capital Advisors.

That is a worrying sign of just how fast and how far the American economy has eroded, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"This is an all-out effort to ensure that the business sector can continue to exist even as economic activity temporarily collapses. The Fed is now effectively the direct lender of last resort to the real economy, not just the financial system," Shepherdson wrote in a client note Monday.

Petrou suggested that the Fed could help in this regard by cutting out the middleman, lending directly to struggling households and mom-and-pop ventures. "The Fed facility is still trickle-down rescue," she said. "I think the Fed should open a facility for families and small businesses."

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The call for even greater monetary policy intervention comes at a time when fiscal policy appears hopelessly mired in partisanship. Elected officials in Washington face increasing urgency to come to an agreement, as Democrats push against Republican resistance for more direct aid for workers and limits on how corporations can spend government money.

"The Fed is definitely taking the lead and being quite encouraging, whereas Congress continues to focus more on partisanship than doing what's right," said Stovall of CFRA Research.

The financial stability of American households, particularly at the lower end of the income spectrum, will only grow more dire as more cities and states order people to stay home, Smith said, and lawmakers are rapidly running out of time.

"The market is needing that fiscal response from the government, because that's what individuals will need. We need to backstop the consumers and help bridge them in this time of uncertainty and distress," he said.

The government "is playing with fire, and the longer they wait, the more expensive it's going to get."