Federal Reserve Will Buy as Much Debt as Needed to Combat Coronavirus Effects

The Federal Reserve announced today that it would buy up as much government-backed debt as it needs to in order to save the financial markets and shore up large and small businesses. Details of the plan—which amount to a major lifeline for U.S. businesses and workers—were posted on the Fed website Monday morning.

“The Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses,” the central bank said in its statement. In early March, the Fed resurrected a bond-buying program The New York Times reports was last used to combat the effects of the 2008 financial crisis—announcing it would spend $700 billion on Treasury securities and $200 billion in mortgage-backed debt.

But those limits have been removed: The Fed won’t limit its purchases, but instead will buy “in the amounts needed to support smooth market functioning.” It’s part of the “aggressive efforts” the central bank says 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.”

The Federal Reserve’s primary role is to promote the stability of the U.S. financial system. And most of the measures it announced Monday are focused on bigger businesses that employ thousands. More relief for small and medium-sized businesses is scheduled to roll out in a second wave. The Fed will be establishing a Main Street Business Lending Program “to support lending to eligible small and medium-sized businesses, complementing efforts by the Small Business Association.”

Its imminent actions to combat the economic effects of the coronavirus, beyond the buying of debt, include:

++ Establishing new programs that, collectively, will provide up to $300 billion in new financing (the Department of the Treasury, using the Exchange Stabilization Fund, will provide $30 billion in equity to these facilities).

++ Establishing two facilities to support credit to large employers and a third facility—the Term Asset-Backed Securities Loan Facility—to support the flow of credit to consumers and businesses, enabling the issuance of securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration, and certain other assets.

++ Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility to include a wider range of securities, including municipal variable-rate demand notes and bank certificates of deposit and credit to municipalities by expanding the Commercial Paper Funding Facility to include high-quality, tax-exempt commercial paper as eligible securities (additionally, the pricing of the facility has been reduced).

++ The loosening of credit for businesses, so investment-grade companies are “better able to maintain business operations and capacity during the period of dislocations related to the pandemic.” And “borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers,” reads the statement.

The Fed has been taking measures in recent weeks to support the flow of credit to households and businesses that include the expansion of central bank liquidity swap lines, steps to ease terms for borrowing at the discount window, the elimination of reserve requirements, and guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus.

(Photo: Pexels)

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JCK Magazine Editor