The Fed launches 2 emergency programs last seen during the 2008 crisis
The Federal Reserve put in place two emergency loan programs that were last rolled out in response to the 2008 financial crisis, with the aim of easing the flow of credit to struggling businesses and households amid the viral epidemic.
WASHINGTON – The Federal Reserve on Tuesday launched two emergency loan programs that were last rolled out in response to the 2008 financial crisis, with the aim of easing credit flows to struggling businesses and households amid of the viral epidemic.
The first, announced in the middle of the morning, aims to unclog a market of short-term loans for what is called “commercial paper”. Large companies issue commercial paper, which is essentially an IOU, to raise cash to meet payrolls and cover other short-term costs.
The second program is also intended primarily to help the commercial paper market and allows a wider range of financial institutions to access short-term loans from the Fed – in this case investment banks and corporate divisions. securities trading of major banks. It also allows them to pledge a wider range of collateral in exchange for the loans. The funds will then be mainly used to purchase commercial paper.
Both are stimulus programs from the time of the financial crisis and were put in place under the authority of the Fed to initiate emergency credit programs with the approval of the Treasury Department.
They also aim to ensure that banks and large corporations can access the liquidity they need even as financial markets recover as Wall Street becomes increasingly convinced that the economy is in recession. The gloomy outlook is leading financial institutions to withdraw from loans, pushing up short-term interest rates. The funds borrowed from the Fed can then be used to lend more widely to households and businesses.
Lending rates in the commercial paper market have skyrocketed as more companies seek to raise cash in the hope that their revenues will fall. When a company wants a short-term loan, say for three months, it sells the commercial paper, usually to a large bank or a money market mutual fund.
But many money market funds seek to sell commercial paper on their own. They need to raise funds because they expect large institutional investors to withdraw funds and they need cash to cover those withdrawals.
All of these activities made it more difficult for banks and other businesses to raise the liquidity they needed.
“The aim is to avert a larger catastrophe that includes skyrocketing bankruptcies, unemployment and underemployment,” said Joe Brusuelas, chief economist at tax consultancy firm RSM. “While we are encouraged by this political step, the Treasury will need to step up its efforts with other funds and bridging loans” that can help companies with lower credit ratings. Only top-rated companies can borrow under the Fed’s new commercial paper program.
In its first announcement on Tuesday, the central bank said it had set up an investment vehicle to buy commercial paper with the approval of the Treasury Department. The Treasury also pledged to guarantee up to $ 10 billion in loans to prevent the Fed from incurring losses. Businesses that borrow under the program will pay a small fee and interest.
“The economic disruption and uncertainty created by COVID-19 has created challenges for the commercial paper market, limiting access to short-term credit for US businesses,” Treasury Secretary Steven Mnuchin said.
The size of each program is not yet clear. The commercial paper market is worth $ 1.1 trillion “and the Fed may own the vast majority,” said Mark Cabana, rate strategist at Bank of America Securities.
Mnuchin said on Tuesday that the Fed could end up holding $ 1 trillion in commercial paper.
Leslie Falconio, senior bond strategist at UBS, said that in 2008 the Fed bought 20% of all commercial paper then in circulation, or about $ 350 billion.
Tuesday’s Fed actions come after the central bank triggered a massive stimulus package on Sunday, when it lowered its benchmark short-term interest rate to near zero and announced it would buy for 700 billion dollars in bonds. The Fed also allowed banks to lend from cash reserves it previously required banks to hold.
Many analysts say they expect the Fed to revive other programs from the time of the financial crisis in the coming days, including one known as the auction facility or TAF. This allows a wider range of banks to borrow from the Fed.