New research from Gilchrist, Wei, Yue and Zakrajšek analyzes the impact the Fed's corporate credit backstop had on funding costs for large companies nber.org/papers/w27809
"The announcement ... influenced credit spreads by significantly reducing near-term default risk."
"The benchmark spread for investment-grade U.S. corporate bonds widened nearly 100 basis points—from already elevated levels—over the few days after [the announcement of the CPFF and MMLF] while the corresponding spread for high-yield bonds jumped 180 bps over the same period."
After the announcement of the corporate lending backstop, bonds below the five-year maturity cutoff experience a drop in credit spreads of 70 basis points, relative to investment-grade bonds above the five-year maturity cutoff, during the post-announcement period.
"Moreover, these effects occur relatively quickly—within 14 days of the April 9 announcement—and are long lasting."
"The total effect of the program announcement lowered credit spreads on eligible bonds by 20 basis points relative to ineligible bonds for an average issuer of both types of bonds."
"We consider all bonds issued by companies that were rated as investment grade before March 23 but were downgraded to a notch below investment grade during the subsequent 10 days and hence became SMCCF eligible with the April 9 announcement."
"When compared to the matched sample of ineligible bonds, fallen angels’ eligible bonds experienced a 340 basis point increase in credit spreads during the 10-day period following the March 23 announcement."
"We then show that the April 9 announcement reversed much of this run-up. In particular, credit spreads on newly eligible bonds issued by fallen angels fall 250 basis points in the ten days following the April 9 announcement."
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The Fed is set to retire its tightening bias at its policy meeting this week.
Officials have a first-class problem—inflation fell faster than they expected—but it poses a conundrum nevertheless: How soon and fast do you dial back restrictive policy?
There's a case for delaying cuts until mid-year or beyond that goes like this: If this is really such a restrictive policy, why is the economy doing so well?
Yes, real rates have been rising, but real incomes are also picking up as inflation comes down.
The case for cutting sooner, notes former Kansas City Fed President Esther George, is that the labor market at turning points "looks like it’s not too bad, and then it goes south quickly."
“We made a very aggressive tightening" that leaves policy well above neutral, she said.
Fed governor Chris Waller: Rate cuts are coming into view but the process should be “carefully calibrated and not rushed.”
As long as growth is fine, “I see no reason to move as quickly or cut as rapidly” as the Fed has in past cutting cycles.
This is a clear pivot from Waller: “From now on, the setting of policy needs to proceed with more caution to avoid over-tightening”
But but but … the Fed’s goal is sustainable 2% inflation. “That goal cannot be achieved for just a moment in time.”
Waller takes a bit of a victory lap on his analysis of the Beveridge curve co-authored with Andrew Figura from May 2022.
That analysis had earned caustic criticism from Larry Summers who said it contained “misleading conclusions” by suggesting a path for immaculate disinflation
Powell's speech at the IMF was interrupted by protesters who want the Fed to use its bank-supervision authorities to take steps that would try to raise the cost of banks to finance fossil fuel activities
During the Q&A, Powell explained his thinking on resisting such pressures
In short, the Fed's autonomy (often called "independence") to manage demand (by setting rates) isn't set in stone.
It's an institutional arrangement: Powers that've been delegated by Congress could be summarily revoked.
Powell: "The temptation to wander into exciting new issues is a strong one and is to be resisted."
"When I think of ways that independence could be undermined, that’s right at the top of the list."
Former Dallas Fed chief Rob Kaplan thinks we're in the early stage of banking woes.
He gave a recent interview that is striking (and I relied quite a bit in this column) because it hits different notes compared to recent Fed speak teeing up a May hike. wsj.com/articles/why-t…
Kaplan says he wouldn't have hiked in March—and wouldn't do so in May, either.
To him, taking fed-funds from 4.75% to 5.25% doesn't do as much for inflation as the potential harm from overshooting because he thinks the inflation fight will be measured in years, not months.
This is from an interview w/Krishna Guha (formerly of the FT and the NY Fed, now a Fedwatcher for Evercore ISI) on April 13.
Kaplan posted it on YouTube:
Kaplan doesn't want to raise rates too much because he thinks having to cut will be too damaging.
For the week ending March 15, small banks saw deposit outflows of $196 billion, up from the initially reported -$120 billion
Total deposits for the March 8-15 period are now reported to have declined $175 billion, up from the initially reported -$98 billion
From the H.8 statistical release: "Data for the week ending March 15, 2023, have been revised to represent a change in the way FDIC bridge banks were incorporated in the small bank data as well as other revisions that were within normal week to week fluctuations."