If you want instant gratification, just tap your smart phone. Craving chicken tikka masala, extra spicy, on your doorstep at midnight? You can use Seamless. Want a ride for your group of friends after a doubleheader at Wrigley Field, or a football match at Old Trafford? There’s Uber. Need a conference room with a TV for six people in Beijing or an office with a telephone in New York? Use WeWork. Wouldn’t it be nice to have a Federal Reserve (Fed) app that could provide infinite liquidity to the marketplace instantaneously?
Monetary policy doesn’t work that way. What we do have, however, is a central bank that is well informed, responsive, creative and decisive.
My comments about apps in no way make light of the current liquidity crunch in the markets today—nor of social distancing. Far from it. I have worked for J.P. Morgan for nearly 20 years, a span of time that has included the dot.com bust, 9/11, the second Gulf War, the global financial crisis, the European sovereign debt crisis, the oil price depression of 2015–2016 and now, the COVID-19 pandemic, and I have never seen a liquidity crunch as severe as this one. We at J.P. Morgan Global Liquidity are laser focused on client requests for inflows and outflows of cash while keeping groups of employees isolated from each other.
Many clients have been asking us how long it will take for the liquidity to return to normal. We expect it will take days, not hours. In some segments of the market, it may take weeks, or longer. Liquidity certainly will not change instantly, app-style.
Responding to the recent increase in volatility and decrease in liquidity in the markets, the Fed has gone into full crisis-fighting mode. I outlined earlier the 10 steps the Fed took last week alone to support the markets. At a high level, they were: implementing zero interest rate policy (ZIRP); restarting quantitative easing (QE); making over USD1 trillion of repo available for Treasuries; using strong forward guidance on rates; lowering the rate at the discount window for banks; reducing reserve requirements for banks to zero; increasing U.S. dollar availability to other major central banks around the globe; setting up the Commercial Paper Funding Facility (CPFF), setting up the Primary Dealer Credit Facility (PDCF) and setting up the Money Market Mutual Fund Liquidity Facility (MMLF). In policymaking terms, these actions are nothing short of herculean, especially given the very short timeline.
Over the course of last week, the front-end markets showed some signs of improvement. As a result of ZIRP, U.S. Treasury Bills are trading at 0% yields. As a result of ZIRP and the increase in availability of Treasury repo, bid-offer spreads on U.S. Treasury bonds are narrowing. As a result of the CPFF, offers on high-quality, primary market, A-1/P-1/F1 rated U.S. commercial paper (CP) are effectively capped at 2.23% yield. As a result of the MMLF, we saw bids on U.S. issued CP owned by prime money market funds.
Are we back to normal? Certainly not. But parts of the market are improving day by day.
This week should bring further progress. And if it doesn’t? We believe the Fed will continue to roll out more programs and/or expand existing ones to fight the crisis. For now, frame your thinking around days, not hours—and save the apps.