The Federal Reserve said it could pump $2.3 trillion into the economy through new and expanded programs it announced Thursday, ramping up its efforts to help companies and state and local governments suffering financial damage from the novel coronavirus.
The central bank rolled out its relief package just as the government announced 6.6 million more Americans were newly jobless, laying bare the severe damage to the economy as quarantines keep workers at home and grind entire sectors to a standstill. About 16 million people have filed for unemployment in the past three weeks.
The Fed announced it would use Treasury Department funds recently authorized by Congress to buy municipal bonds and expand corporate bond-buying programs to include some riskier debt. The Fed also rolled out a highly anticipated lending program that targets mid-size 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 its push.
“We are deploying these lending powers to an unprecedented extent, enabled in large part by the financial backing from Congress and the Treasury,” Jerome Powell, the Fed chairman, said in a speech after the announcement 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.”
The Fed and Congress have been racing to support the U.S. economy as coronavirus shutters businesses, tanks consumer confidence and leaves millions of workers without a paycheck.
While some of their newly announced programs urge or incentivize companies to maintain their payroll, they are just getting up and running and coming too late for many workers. The most recent economic rescue bill signed into law by President Donald Trump included a new cushion for laid-off workers, in the form of more generous unemployment benefits.
The Fed’s goal is to make sure the ongoing hit to the labor market and the broader economy does not prove long-lived. The emergency programs are intended to get credit flowing to companies and governments that might struggle to access funding as uncertainty roils markets, helping them to make it through. Congress gave the Treasury Department $454 billion to back up the Fed’s efforts, which need to be insured against losses, giving officials room to scale them up dramatically.
The Fed’s moves Thursday make use of that funding to push the central bank’s emergency lending powers into uncharted territory. Officials had 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.
And the Fed provided details on another previously untried program that could give relief to major U.S. employers left out of other government initiatives. About 19,000 companies have between 500 and 10,000 employees, and they employ 30.3 million workers, Census Bureau data show.
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 new program. Banks will originate the loans and retain a 5% share, but will sell the remainder — in total, up to $600 billion — to the Fed. The Treasury will provide $75 billion in backup to protect the central bank.
While companies seeking the loans “must commit to make reasonable efforts to maintain payroll and retain workers,” according to the announcement, no strict standards define what that means or how it will be enforced, Fed officials indicated during a briefing with reporters.
And though the borrowers must follow restrictions on compensation, stock repurchase and dividend restrictions set out in the recently passed congressional package, the Fed stopped short of applying limits on offshoring suggested in the law.
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 program design is still open to comment. The Fed gave no guidance on when it, or other new programs announced, would be up and running.
Helps for state and city governments
Fed relief for states and cities had also been highly anticipated because Congress provided only limited help to those governments 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 operations 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 — with durations up to two years — straight from U.S. states, counties with at least 2 million residents, and cities with a population of at least 1 million, according to the Fed release.
“Eligible state-level issuers may use the proceeds to support additional counties and cities,” the Fed said, while foreshadowing there might 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.
That’s in part because they are adding riskier debt: Some companies downgraded to below investment grade after March 22, for instance, will now be eligible for Fed help. So will some high-yield exchange-traded funds, which are built on bonds but trade like stock.
Companies that benefit from the programs will not be forced to restrict share buybacks or dividends, Fed officials told reporters. Congress mandated in its legislation that businesses receiving “direct loans” using the new funding must do both, but the Fed does not see the corporate bond-buying as falling under that umbrella.
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.
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.
The Fed is trying to make sure a broad swath of companies can continue obtaining credit, allowing them to stay in business and hang on to workers.
The central bank did hint at its own limits Thursday, even as it redoubled its efforts. Some lawmakers, including House Speaker Nancy Pelosi, a Democrat, have been urging the central bank to “think big,” while others have worried the funding going to the Fed would be used to “bail out” big companies.
Powell emphasized the Fed cannot actually distribute money, just enable loans.
“These are lending powers, not spending powers,” Powell said. “The Fed is not authorized to grant money to particular beneficiaries.”