The Fed’s latest effort to stabilize the economy amid the coronavirus crisis includes supporting liquidity to corporates and municipalities. The central bank is also looking into an effort to aid “main street” businesses.
Reminiscent of various measures taken during the 2008 financial crisis, the current measures will help ensure that credit continues to flow smoothly to consumers and businesses.
In a March 23 statement, the Fed said, “While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”
This Fed stimulus comes about as Congress is still not ready with its own more than $1 trillion fiscal stimulus package.
TALF will enable the smooth flow of credit
The central bank is setting up a facility that will enable it to lend on loans backed by assets such as credit card loans. The so-called Term Asset-Backed Securities Loan Facility (TALF) will allow the Fed to lend on certain recently originated investment-grade securities that are backed by credit card loans and other assets.
The Fed will lend to holders of the securities at a discount on the value of the securities, which could be backed by student loans, auto loans, loans that are guaranteed by the Small Business Administration and other assets, in addition to credit card loans.
This facility will enable the issuance of securities backed by credit card and other assets, and help ensure the smooth flow of credit to these markets, the Fed said.
See related: How to apply for an SBA disaster loan
Emergency measures include quantitative easing
The Fed will also purchase Treasury securities and agency mortgage-backed securities as required to support favorable interest rates on lending activity. The Fed is purchasing at least $500 billion in Treasury securities and $200 billion in mortgage-backed securities.
In addition, the Fed reports that it will extend its purchases to agency commercial mortgage-backed securities, or securities backed by commercial real estate assets.
The Fed is putting in an assortment of other backstops, including:
- New programs that will provide in total up to $300 billion in new funding that will flow through the economy. The Department of the Treasury is investing $30 billion in these programs.
- A Primary Market Corporate Credit Facility that will support large employers’ issuance of bonds and loans, and a Secondary Market Corporate Credit Facility that will enable liquidity on corporate bonds that are outstanding.
- Supporting the credit needs of municipalities by expanding the scope of the Money Market Mutual Fund Liquidity Facility to enable the purchase of more assets.
- The scope of the Commercial Paper Funding Facility is also being expanded to support the credit needs of municipalities. This facility will now accept as collateral tax-exempt commercial paper and will provide more favorable rates of financing.
- The Fed is also going to come up with a “Main Street Business Lending Program” to lend to small and medium-sized businesses, in tandem with the efforts taken by the Small Business Administration.
The Fed has engaged in a variety of efforts in the last week as the coronavirus panic escalated. This includes asking banks to be lenient with customers who are experiencing financial difficulties.
Commenting on the Fed’s actions, Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted in his March 23 daily commentary that with these programs the Fed’s balance sheet is once again on an expansion course. He sees this as essential, considering that “the near-term threat to the economy is existential.” The economy is more at risk from a “deflationary collapse,” rather than facing any threat of inflation.
Before the coronavirus panic set in, the Fed had been trying to wind down its balance sheet following its massive stimulus efforts during the financial crisis. With these current actions, the Fed is now “effectively the direct lender of last resort to the real economy, not just the financial system.”
According to Pantheon’s forecast, “In our base case, if Congress acts aggressively — $2T-plus, including serious support for the self-employed and gig workers — and the disease is under control by the end of May, the economy will rebound very strongly in the third quarter, with only a modest loss of capacity from businesses going under. The second quarter is anyone’s guess, but a huge double-digit decline is inevitable even if activity rebounds strongly in June.”