The Federal Reserve’s emergency lending facilities saw only a modest uptick in usage this past week, even as the US central bank brought online yet another of its long-awaited programmes, underscoring the strength of the financial recovery it helped to propel.
According to Financial Times calculations based on Fed data published on Thursday, just $103bn of the Fed’s firepower has been deployed through the various emergency facilities it has unveiled since March. That is up from $100bn a week earlier, but still less than 4 per cent of the at least $2.6tn the central bank pledged it would make available.
Overall, the size of the Fed’s balance sheet — which has expanded to an unprecedented level due to the central bank’s purchases of trillions of dollars of Treasury bonds — fell for the second straight week, to $7.1tn. Analysts flagged the continued decline in demand for the Fed’s dollar swap lines from foreign central banks as one of the primary reasons.
The slight increase in usage of the Fed’s emergency facilities was partially driven by the central bank’s holdings linked to its corporate bond-buying programme, which rose to $8.7bn, from $7bn a week earlier.
The Fed has recently expanded its purchases beyond exchange traded funds that invest in corporate bonds to include individual securities that are part of a newly created index. In March, when the central bank first said it would buy bonds, companies were scrambling to secure financing to see out the coronavirus pandemic and the Fed’s promise to support markets quickly caused borrowing costs to fall.
The rise in the Fed’s interventions in the corporate bond market in the past week stood in contrast to other corners of the financial system that the Fed has sought to support. It has launched or plans to launch 11 emergency facilities that operate under powers that allow the central bank to make asset purchases in “unusual and exigent circumstances”.
Usage of the Commercial Paper Funding Facility, or CPFF, which has helped to unfreeze a $1.1tn market used by companies to raise cash for short-term needs, remained at $4.2bn, marking the seventh straight week around those levels.
And fewer market participants tapped the Primary Dealer Credit Facility, which provides loans of up to 90 days to approved dealers of government debt, this week. Its usage is down 89 per cent since its peak during the week of April 15.
Another facility, the MMLF, aimed at supporting money market mutual funds has also seen reduced demand. Usage has dropped 57 per cent since its peak during the week of April 8.
Usage of the Municipal Liquidity Facility, or MLF, which buys debt directly from municipal governments, now stands at $1.2bn, nearly unchanged from prior weeks. A set of facilities to support small and medium-sized companies, otherwise known as the Main Street Lending programme, is among those still not operational.
Mark Cabana, an interest rates strategist at Bank of America Merrill Lynch, said the modest usage to date is largely positive and shows that the Fed is seen as “credible” by market participants.
But, he warned that “underwhelming” usage for the facilities aimed at supporting state and local governments as well as small and medium-sized businesses could be perceived negatively, especially given the amount of pressure these entities are under.
“The risk is it that the Fed is seen as insufficiently impactful,” he said.
The Fed’s reported figures for certain facilities include cash infusions from the Treasury department that are earmarked to help set up the facilities. The FT’s calculations strip out those accounting effects.