The Fed expands its rescue plan

The Fed's rescue plan aimed at guaranteeing the liquidity of the municipalities will also continue until December

The Fed’s rescue plan aimed at guaranteeing the liquidity of the municipalities will also continue until December.

Investors remain wary of the Federal Reserve (Fed) meeting, which wraps up tomorrow without the coronavirus pandemic showing signs of being under control. At this point, the Fed hoped for a certain recovery in the economy that would not allow the rate hike, a movement that will have to wait until at least 2022, but the status quo of the current rescue plan in the form of a massive purchase of debt.

However, the number of Covid-19 infections continues to skyrocket and the Fed will not be able to step back. For now, the US central bank has announced that it will extend until December 31, 2020 the loans to households, companies and public administrations approved urgently and that, in principle, were to end in September. The Fed program aimed at guaranteeing the liquidity of the municipalities will also continue until December, while the plan for the purchase of company debt will continue until March 2021.

Gilles Moëc, chief economist at AXA IM, says he is convinced “that more stimuli will be agreed” after the meeting, especially given the country’s “impending elections”. However, he warns that they will be “less generous” than at other times.

In the face of an unprecedented international health emergency, the Fed launched a much larger bailout than the 2008 financial crisis. After endowing the system with enormous liquidity, the Federal Reserve announced in April a new loan plan worth 2.3 trillion dollars destined for States, municipalities and small and medium-sized companies, very affected by the coronavirus pandemic. The massive purchase of central bank debt also included so-called fallen angels, that is, those entities that were located at the investment grade but that, due to the crisis, fell to the level of speculation.

The plan was backed by the $ 2.2 trillion Congress-approved aid program, which is beginning to run out.

The AXA IM expert warns that the revival of the economy in the United States may not come in the third quarter, as expected. “We are concerned about the relapse of the pandemic in the United States and the indirect effect on economic activity that the market has so far chosen to ignore,” says Moëc. In addition, the economist warns that the labor market “also shows some signs of relapse”, a scenario that generates “political headaches” since the United States Government has already spent a lot and has committed to a support that In his opinion, “it is excessive” and that it is generating “stimulus fatigue”.

For his part, Jack Janasiewicz, portfolio manager of the investment fund manager Natixis Investment Managers, also considers that monetary policy will continue “very, very accommodative” and points out the fiscal aspect. “The impact of the virus continues, and we continue to see a slow recovery that can be described as uneven, even if it goes in the right direction. What is worrying is what happens to the tax debate that is taking place in Congress about the benefits for the unemployment “, pointing out that a step backwards in the aid could give rise to the expectation of a massive accommodative intervention by the Federal Reserve.

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