New Fed Programs Could Pump $2.3 Trillion Into the Economy

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

The central bank rolled out its relief package just as the government announced that 6.6 million more Americans were newly jobless, laying bare the severe damage to the economy from quarantines. About 16 million people have filed for unemployment in the past three weeks.

The Fed announced that it would 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 also rolled out a highly-anticipated business lending program that targets midsize companies, including those not eligible under a Small Business Administration loan program.

The measures push the Fed far beyond anything it attempted in the 2008 financial crisis, and expand its already significant efforts to cushion the economy and calm markets, which have included money market interventions and an unlimited bond-buying campaign. The Fed had previously rolled out about $500 billion worth of emergency lending programs, so this could more than quadruple the size of those programs.

“We are deploying these lending powers to an unprecedented extent, enabled in large part by the financial backing from Congress and the Treasury,” said Jerome H. Powell, the Fed chair, in a speech following the announcement on Thursday. He pledged to continue using those powers “forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”

Congress recently gave the Treasury Department $454 billion to back up Fed emergency lending facilities, which the Fed uses to keep credit flowing into the economy in extreme circumstances. The facilities need to be insured against losses when they have credit risk, so the extra backstop has enabled the central bank to expand its programs.

The Fed’s moves on Thursday expand its emergency lending powers into new territory. The central bank has avoided buying municipal debt and 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 that could provide relief to major American employers — those with up to 10,000 workers.

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. Companies that employ up to 10,000 workers, or which have less than $2.5 billion in revenues, will be able to access four-year loans through the program. Banks will originate the loans and retain a 5 percent share, but will sell the remainder to the Fed.

“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.

Principal and interest on those loans can be deferred for one year, but the borrowing is not forgivable, unlike the small business loans Congress authorized.

The Fed’s newly-announced Municipal Liquidity Facility has also been highly anticipated since Congress provided only limited relief to state and cities in its recent legislation. The markets local governments use to issue bonds and finance themselves have been in turmoil, which threatened to make it difficult for officials to fund their governments just as sales tax and other revenues dried up and the need for cash skyrocketed.

The new program will buy up to $500 billion of short term notes straight from U.S. states, counties with at least 2 million residents, and cities with a population of at least one million residents, according to the Fed release.

“Eligible state-level issuers may use the proceeds to support additional counties and cities,” the Fed said, while foreshadowing that there may be more to come. The central bank “will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.”

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.

The TALF program, which everyone from lawmakers to private equity firms have been urging the Fed to expand, will now accept bundles of debt built on both commercial mortgages and leveraged loans, which are given to companies already deeply in debt. That said, those bundles — called asset-backed securities — must still be very highly rated, among other restrictions. Big investors have been pushing the Fed to expand the program down the ratings ladder.

“It’s not like the door is open to every piece of junk in the world — far from it,” said Julia Coronado, founder of MacroPolicy Perspectives. “It looks shocking, but I think there’s definitely still credit-checking, and quality standards.”

The central bank doesn’t seem to have slammed the door on the possibility of further expansion.

“The feasibility of adding other asset classes to the facility or expanding the scope of existing asset classes will be considered in the future,” the Fed said in its term sheet.

But the central bank did hint at its own limits. Some lawmakers, including House Speaker Nancy Pelosi, a Democrat, have been urging the central bank to “think big,” while others have worried that the funding going to the Fed would be used to “bail out” big companies.

Mr. Powell underlined that the Fed cannot actually give out money, just enable loans.

“These are lending powers, not spending powers,” Mr. Powell said. “The Fed is not authorized to grant money to particular beneficiaries.”

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