Tail Risks on the Horizon?

Posted on November 22, 2020 by Florian Buschek

A quick follow up on my recent post:

It looks like Steven Mnuchin really withdraws funding for a part of the lending facilities of the Federal Reserve. The FT has an excellent overview over all the facilities, their uptake and which ones will be suspended in December:

The plumbing of the financial markets is still covered with the remaining facilities. But corporate bond markets will lose their backstop and this provides the possibility of stresses ahead.

Not all is bleak however, take up was very limited and the Fed is almost certainly ready to expand their asset purchases if stresses emerge and this should radiate into all credit markets. In fact the Fed is already expected to expand their purchases into longer maturities to provide more accommodation (even though the effectiveness may be debated) and prevent any turbulences in the first place.

George Selgin, an expert on monetary policy and prolific writer, has an excellent thread pushing back against the notion that Mnuchin acts prematurely and explains why in fact the better way to use these funds would be for congress to spend them directly. Selgin has always been critical of these facilities and his opinion should carry a lot of weight.

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