This has never happened in the history of the United States
On April 29, a regular scheduled meeting of the Committee on Open Market Operations (FOMC) of the US Federal Reserve System took place on the issue of the key rate.
Before that, the overwhelming majority of analysts predicted that there would be no rate change. Let me remind you that in March, the US Federal Reserve System twice unscheduled lower interest rates. Typically, the US Federal Reserve changes the rate by 0.25 percentage points (a standard step). On March 3, it was lowered by two steps at once - from 1.5-1.75% to 1.0-1.25%. On March 16, there was another extreme (unplanned) decline - and again two steps down. Now the rate has become equal to 0.0-0.25% per annum. This is the level of the "plinth" at which the key rate has been since the height of the financial crisis of 2008-2009. until December 2015, when the first rate increase was made by one notch. Several more hikes were made, and in December 2018, the rate peaked at 2.25-2.50%.
It was a time of sharp controversy between the US Federal Reserve and Donald Trump, who believed that the Fed was killing the US economy with a high key rate. In a fit of rage, he even declared that the Federal Reserve is a greater threat to America than … China. The ice broke only last summer, when the US Federal Reserve finally cut the key rate by one notch - to 2.00-2.25%. On October 30, 2019, it was already reduced to 1.75-2.00%. And this year it rolled down.
The rate cut in March 2020 was an extreme measure. According to Jerome Powell, the head of the US Federal Reserve, it was dictated by the fact that "the outbreak of the coronavirus has damaged society and disrupted economic activity in many countries, including the United States."
Trump was very pleased with the Fed's actions, but even this radicalism of the American Central Bank did not have an effective effect. The largest banks (Bank of America, Morgan Stanley, etc.) updated their forecasts in April and expect a catastrophic collapse of the American economy - up to 40% in the second quarter of 2020. The country will lose an estimated 25 million jobs in April due to plant closures and quarantines. This has never happened in the history of the United States.
Financial analysts and American business leaders were eagerly awaiting yesterday's meeting of the COOP, April 29, but most believed the key rate would remain unchanged. Its departure into the negative zone would create unacceptably high risks. One of the main risks is a dangerous depreciation of the US dollar against other currencies.
The viral and economic crisis in the United States is much more difficult than in other countries. April saw a clear depreciation of the US dollar against ten other significant currencies. And if the fall in the dollar exchange rate becomes long-term and permanent, the entire structure of the world dollar system, which has been built for 75 years, may collapse. For America, the collapse of such a structure could be the real end of the world. In short, there were no sensations on April 29, the Fed's key rate was left unchanged. I do not think that it will change based on the results of subsequent meetings of the COPD (eight such meetings are held a year).
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American analysts are confident that in the next two years the current key rate will become a certain constant, which there is no point in even discussing. The US Federal Reserve is now betting on other instruments to influence the economy. This is also stated in a press release following the meeting of the COOF: “To support the flow of loans to the household and business sector, the Federal Reserve will continue to purchase treasury securities, as well as securities of mortgage agencies and commercial mortgage-backed securities in volumes necessary for the smooth functioning of the market, thus stimulating an effective transition of monetary policy to the formation of more general financial conditions. " Translated into Russian from this "bird language", this statement of the Federal Reserve means:The American Central Bank will provide direct financial assistance to the American economy.
Economics textbooks, describing the activities of modern central banks, say that they do not communicate directly with companies in different sectors of the economy. They work with commercial banks, which, in turn, interact with companies (provide loans, buy corporate securities, open settlement and other accounts, etc.). However, these textbooks are outdated. Thus, the Bank of Japan has been working with companies for a long time, acquiring their corporate securities (mainly bonds, but recently also shares). To keep up appearances, the Japanese central bank does this not directly, but through exchange-traded funds (ETFs) - intermediary structures. Today, the Bank of Japan, by the way, is the largest shareholder in Japanese companies whose shares are listed on the stock exchange. A similar scheme is used by the Swiss National Bank (NSB). Only the Swiss Central Bank has gone even further: it acquires corporate securities not only of Swiss, but also of foreign companies. First of all, American.
It seems that the Fed is also switching to this scheme of work. The consequences of switching to the new scheme are still difficult to assess. I have already written that the US Federal Reserve, together with the US Treasury Department, are creating a number of facilities (facilities) that will allow buying up various types of corporate securities at the expense of FRS loans. These mechanisms are based on Special Purpose Vehicles (SPV). The authorized capital of the SPV company is formed at the expense of budget funds. From a legal point of view, these are American Treasury companies. For every dollar of SPV capital, the Federal Reserve provides the company with a loan of $ 10 (1:10 leverage). The received loans will be used by SPV companies to purchase a variety of securities: 1) corporate securities at their initial placement on the market; 2) corporate securities of the secondary market; 3) commercial papers;4) municipal papers; 5) securities issued under guarantees of the Small Business Administration (SBA); 6) other securities.
This pattern of cooperation between the Federal Reserve and the US Treasury is reflected in the Coronavirus Aid, Relief and Economic Security [CARES] Act. The law was signed into law by Trump on March 27, 2020. In total, the US Treasury received $ 2.2 trillion to combat the pandemic and its economic consequences. dollars. In the CARES law, 454 billion dollars are intended for the capitalization of SPV; therefore, it can be assumed that the maximum amount of loans that can be obtained by new companies will exceed $ 4.5 trillion. The mentioned amount is approximately equal to the value of all the assets of the Fed at the beginning of 2020. Consequently, the potential of CARES will be used to its maximum, the assets of the Federal Reserve should double to $ 9 trillion.
However, one should not forget that the FRS is still carrying out a “quantitative easing” action, which is not limited either by time or amount. Let me remind you that the programs of "quantitative easing" (QE) were carried out by the Federal Reserve in 2008-2014. and consisted in the fact that the American Central Bank bought up US Treasury bonds and debt securities of American parastatal mortgage agencies. Then, as a result of the implementation of the KS programs, the Fed's assets increased from 0.8 to 4.3 trillion. dollars the Federal Reserve has inflated like a soap bubble. The inflation of the “bubble” resumed more than a year ago, but then the maximum amounts of possible purchases of securities were determined. Now, as one can understand, decisions are made by the American Central Bank on a situational basis. At the beginning of April, the Fed's assets exceeded 6 trillion. dollars. Taking into account the launch of programs for the purchase of corporate securities and the continuation of the KS program, we can safely say that the assets of the US Federal Reserve may double from the value of 6 trillion. dollars, which today seems fantastic to many.
And one more question: where will the US Treasury of the USA get money for the implementation of measures determined by the CARES law (including money for the capitalization of SPV companies)? Yes, at the expense of the same FRS, which will buy US Treasury bonds. Experts expect that by the end of the current fiscal year, the US national debt may increase by 3 trillion. dollars next year - by the same amount. If this continues for several years, the revenue side of the American budget will begin to be formed not through taxes, but with the help of loans provided by the Federal Reserve.
If we take our reasoning to its logical conclusion, we get an interesting picture: America's corporate business is a bubble, the American budget is also a bubble. Both bubbles are inflated by the Fed's printing press. At the same time, the Federal Reserve itself becomes a giant bubble. This is such a financial theater of the absurd. Or American financial dystopia. Experts in the United States call America's near future more politically correct: financial post-capitalism.
PS The picture of American financial dystopia should be supplemented with one more touch. In the described scheme, there is no place for the famous Wall Street banks, they are being replaced by SPV companies. Wall Street banks are turning out to be the fifth wheel in the cart of American post-capitalism.