Fed to Buy Municipal, Riskier Debt as Part of Expansive Programs

The Federal Reserve said it could pump $2.3 trillion into the economy through new and expanded programs it announced on Monday, ramping up efforts to help companies and state and local governments suffering financially amid the coronavirus.

The central bank announced that it will use Treasury Department funds recently authorized by Congress to buy municipal bonds and expand corporate bond-buying programs to include some lower-rated and riskier debt. The Fed will also set up a business lending program that targets mid-size companies including those not eligible under a Small Business Administration loan program.

“The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity,” Fed Chair Jerome H. Powell said in the release.

The Fed’s moves expand its emergency lending powers into new territory. It has not previously used its authorities to buy municipal debt or lower-rated company debt, out of concern about credit risk and to avoid picking winners and losers. But amid market disruptions, calls for Fed action in both areas have been building.

The Fed also provided details on a highly-anticipated program it had previously said it would roll out. The central bank will buy up to $600 billion in loans through its Main Street Lending Program, with the Treasury providing $75 billion in backup. That effort will offer 4-year loans to companies that employ up to 10,000 workers, or which have less than $2.5 billion in revenues. Banks will originate the loans and retain a 5 percent share, but will then sell the remainder to the Fed.

Congress recently gave the Treasury Department $454 billion in funding to back up Fed emergency lending facilities, which need to be insured against losses when they have credit risk.

“Firms seeking Main Street loans must commit to make reasonable efforts to maintain payroll and retain workers,” according to the announcement, and must follow restrictions on compensation, stock repurchase, and dividend restrictions set out in the recently-passed congressional package.

The Treasury will also ramp up its insurance on the Fed’s two corporate bond-buying programs and its so-called Term Asset-Backed Securities Loan Facility, or TALF. Those will now have $85 billion in Treasury backing as they expand. That’s in part because they are adding riskier debt: some companies that were downgraded to below investment grade after March 22, for instance, will now be eligible for Fed help.

A new Municipal Liquidity Facility will purchase up to $500 billion of short term notes directly from U.S. states, according to the Fed release.

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