WASHINGTON: In its boldest effort to protect the U.S. economy from the coronavirus, the Federal Reserve says it will buy as much government debt as it deems necessary and will also begin lending to small and large businesses and local governments to help them weather the crisis.
The Fed’s announcement Monday removes any dollar limits from its plans to support the flow of credit through an economy that has been ravaged by the viral outbreak. The central bank’s all-out effort has now gone beyond even the extraordinary drive it made to rescue the economy from the 2008 financial crisis.
“The coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said in a statement. “Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. 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.”
Financial markets sharply reversed themselves after the announcement but then fell back again after the market opened. By mid-morning, the Dow Jones Industrial Average was down about 1.5%. The yield on the 10-year Treasury bond fell, a sign that more investors are willing to purchase the securities.
In unleashing its aggressive new efforts, the Fed is trying both to stabilize the economic standstill and allay panic in financial markets. Many corporations and city and state governments are in desperate need of loans to pay bills and maintain operations as their revenue from customers or taxpayers collapses. That need has escalated demand for cash. In the meantime, large businesses have been drawing, as much as they can, on their existing borrowing relationships with banks.
The intensifying needs for cash means that banks and other investors are seeking to rapidly unload Treasuries, short-term corporate debt, municipal bonds and other securities. The Fed’s move to step in and act as a buyer of last resort is intended provide that needed cash.
The new programs announced Monday by the Fed include two that will buy corporate debt issued by large companies. The Fed legally can’t lend directly to companies. But it can lend to separate entities, which can then make those purchases.
One program will buy newly issued corporate debt. This is an effort to revive that market, which has effectively come to a standstill. The second will buy previously issued corporate debt. Both programs will include $10 billion provided by the Treasury to offset any losses.
A third new lending program will buy securities backed by packages of auto loans, credit card loans and some small business loans. Lending in those areas hinges on the ability of banks to package those loans into securities and sell them. So the Fed’s move is critical to the ability of banks to continue to provide these loans as the economy falters.
The Treasury will also provide $10 billion to that program to offset any losses. All told, those three programs can lend up to $300 billion.
The Fed also said it will soon establish a “Main Street Business Lending Program”to support lending to small and medium-sized businesses. But it provided few details and didn’t say when that program would begin.
The central bank’s efforts to protect the economy could be amplified by rescue legislation moving through Congress. Senate Republicans have proposed providing roughly $500 billion to the Treasury Department that it could use to then backstop more lending by the Fed.