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  4. Markets must understand support programs propping up prices won't go on 'indefinitely', Dallas Fed's Kaplan says

Markets must understand support programs propping up prices won't go on 'indefinitely', Dallas Fed's Kaplan says

Emily Graffeo   

Markets must understand support programs propping up prices won't go on 'indefinitely', Dallas Fed's Kaplan says
  • Robert Kaplan told Bloomberg on Monday that markets must understand the Fed programs have a "sunset date."
  • The president of the Federal Reserve Bank of Dallas said markets need to function without Fed support.
  • On the primary and secondary credit market facilities, as well as the municipal program, Kaplan said that "usage is not an indicator of the power of the program."
  • Visit the Business Insider homepage for more stories.

Robert Kaplan, president of the Federal Reserve Bank of Dallas, told Bloomberg on Monday that it's very important that the markets understand the Fed-supported programs "will lapse."

Kaplan noted the Fed has just expanded its emergency lending programs until December 31. However, he emphasized it's very important these programs "have a sunset date." The Dallas Fed president said that the markets need to function without support, and that "the Fed support creates its own fragility in the markets."

Kaplan also said "13(3) programs have helped backstop these financial markets." Section 13(3) of the Federal Reserve Act grants the Fed emergency lending authority. The Main Street New Loan Facility and the Primary and Secondary Market Corporate Credit Facilities are all 13(3) programs.

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The primary and secondary credit market facilities have up to $750 billion available, and the Federal Reserve bank has purchased $12.3 billion in bonds, according to Bloomberg. The Main Street program allows it to buy up to $600 billion, but the central bank has bought only $82 million, Bloomberg said.

Kaplan said that "usage is not an indicator of the power of the program. Just by announcing these programs and making clear that we would help provide a backstop to these markets, you've seen a substantial rally and flow of funds into these markets."

Kaplan compared this take to his view on programs like PPP, which he said are "very critical that they got used."

He added, "I worry as healthy as the financial markets are, one place they're not loose is for small and mid-size companies ... PPP is critical for helping those companies get credit."

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