The Federal Reserve, determined to try to prevent the spread of the coronavirus from devastating the U.S. economy, on Monday launched a series of sweeping new programs designed to support businesses large and small and keep markets functioning.
Like mortgage markets showed signs From the collapse, companies struggled to sell debt and tensions plagued the entire financial system, the Fed announced several never-before-attempted actions in an attempt to calm the turmoil.
The Fed has pledged to buy as much government-guaranteed debt as needed to support housing markets and treasury bonds. He announced that he would buy corporate bonds for the first time in history, including the riskiest investment grade debt. And he promised to unveil more, including support for small businesses, in the days and weeks to come.
The Fed is pulling its weight to deal with the economic fallout from the coronavirus, which poses a serious threat as factories close, people lose their jobs and the economy shuts down as lawmakers in Congress continue to struggle to find a fiscal response, making the central bank the first line of defense.
“The speed of the response was unprecedented speed,” said Roberto Perli, partner at Cornerstone Macro and former Fed economist. “It’s an ‘whatever it takes’ moment, but backed by action.”
In an attempt to curb the virus, several other states, including Massachusetts, Michigan and Oregon, decided on Monday to impose stay-at-home orders. Such orders will soon cover more than 100 million Americans.
In New York City, which accounts for about 6% of the world’s virus cases and faces critical medical shortages, Governor Andrew M. Cuomo has ordered hospitals to increase capacity by at least 50%. Nearly 21,000 cases have been recorded in the state, with at least 157 deaths. But President Trump has suggested he will soon reassess federal guidelines urging social distancing. Also on Monday, he signed an executive order to prevent individuals and businesses from stockpiling supplies and engaging in price hikes.
In Britain, the government has imposed a virtual lockdown, shutting down all non-essential stores, banning meetings of more than two people and forcing people to stay at home except for travel for food or medicine.
The Fed’s actions, decided over weeks of consecutive late nights, are meant to be just a first step. They could be sharply stepped up if Congress grants the Treasury Department additional funds to support the Fed’s programs, proposed by Republican lawmakers but Democrats resist.
“Strong efforts must be made in the public and private sectors to limit the loss of jobs and income and to promote a rapid recovery once the disruptions have subsided,” the central bank said in a statement Monday morning, an unusually warning brutality of a usually calm man. institution.
The central bank, which has relaunched its giant bond buying program eight days ago, said it would grow well beyond the “at least” $ 700 billion in treasury and $ 200 billion in mortgage-backed securities it had originally committed to buy . Instead, officials will buy bonds “in amounts necessary to support the proper functioning of the market” – including the purchase of government guaranteed debt tied to commercial real estate.
The program, which the Federal Open Market Committee responsible for setting policy has unanimously supported, is a nod to the fact that crucial markets at the center of the financial system have struggled to function. By establishing such an explicitly unlimited package and creating such expansive emergency lending programs, the central bank is going way beyond its 2008 financial crisis playbook.
As the virus has emptied shops, planes and hotels, businesses large and small have felt economic pain. Many will need financial support to survive, whether in the form of loans or new debt issuance. With companies on shaky ground and cash-hungry investors unwilling to grab hold of outstanding corporate debt, interest rates have surged, making it too expensive for companies to raise funds by selling new ones. obligations.
The Fed’s plan to strengthen the corporate bond market will work through two new programs established using the Fed’s emergency lending powers. They should contribute to the functioning of the market while allowing companies to stay afloat.
One, the Primary Market Business Credit Facility, is open to good quality businesses and will provide four-year bridge financing, the Fed statement said. The Fed will create a special vehicle that will buy both bonds and provide loans.
The program defers interest payments on this bridging financing “for six months, expandable at the discretion of the Board of Governors” to get businesses through the worst of the coronavirus period. But with the support comes restrictions – companies that opt for the option aren’t allowed to repurchase stock or pay dividends, both of which eat up a company’s cash flow.
The other would buy debt already issued, and the Fed together said the programs “will support credit to large employers.”
Fed officials are also taking action to support small businesses, resurrecting a 2008 financial crisis program, the Term Asset-Backed Securities Loan Facility, or TALF, which encouraged lending to small businesses and households. Officials also said they would be implementing a new program, the Main Street Business Lending Program, which “would support lending to qualifying small and medium-sized businesses,” though they gave few details on how.
The three expanded programs will provide “up to $ 300 billion in new funding,” the central bank said.
Republican senators suggested creating a $ 425 billion fund in the Treasury Department that the Fed could use to support emergency lending facilities – which would allow such programs to grow well beyond that scale. .
Because the Fed cannot assume substantial credit risk on its own, the Treasury Department is backing up its emergency loans, using money from a fund that only contains $ 95 billion. Treasury Secretary Steven Mnuchin suggested on Sunday that the new money from the Republican bill could be used by the Fed to support some $ 4 trillion in funding.
“We have limited amounts of money that we use before Congress passes this bill, so we are not waiting for Congress,” Mnuchin said in an interview on CNBC Monday. “As Congress gives us the authority, we will dramatically increase the facilities. “
Yet the additional support has become a political flashpoint and one of the sticking points of a larger congressional relief plan. Democrats fear that the Fed’s lending will come with too few restrictions. Beyond limiting which companies receive its loans and deferring interest on share buybacks, the Fed declined to say whether it had the legal power to go further, such as preventing beneficiaries from laying off workers.
Democrats blocked Republicans from voting on the budget bill before negotiations ended on Sunday, blocking it’s still Monday.
In their own bill in the House, Democrats called on the Fed to establish a small business lending facility. The bill would require the creation of a Fed facility that would indirectly help people who default on mortgage payments because of the coronavirus, and one that would buy and sell municipal debt used to fund public health responses.
Congressional leaders and the Trump administration remained stuck in negotiations Monday night. The total tax response could approach $ 2 trillion, including assistance to workers, businesses and small businesses, and direct payments to low- and middle-income families.
The Fed announcements arrived early Monday as the markets are bracing for a tumultuous day.
Traders remained cautious about the central bank’s ability to change the course of the economy and stocks sank throughout the day, with the S&P 500 index closing nearly 3%.
“The problem is, people are still waiting for the budget plan and the spread of the virus is getting worse,” said Priya Misra, head of global rates strategy at TD Securities. She pointed out that in the markets, the Fed was trying to appease – especially mortgage debt – conditions had improved.
“The Fed’s facilities worked in the market today,” she said. “The problem is, we’re heading into a recession – and a pretty deep recession.”
The Fed has acted almost daily as the coronavirus spreads, shutting down huge swathes of the United States and the global economy and threatening to plunge the world into a major downturn.
Central bank reduced interest rates near zero just over a week ago. In the days that followed, he increased the size of his cash injections – intended to keep the market for short-term loans between banks functioning normally – and announced several other emergency lending programs.
He is buy commercial paper, a type of short-term debt that corporations use to finance themselves, and it has supported money market mutual funds, which businesses and firms use to save money, including those that invest in municipal debt.
The Fed’s primary objective is to prevent the economic shock, admittedly brutal but which could turn out to be short, from turning into a full-fledged financial crisis which interrupts the flow of credit to the businesses and households that have it. need.
The blow to growth promises to be substantial, even without the acceleration of a financial collapse.
Goldman Sachs economists estimate growth could contract 24% in the second quarter while Morgan Stanley projects a 30% impact, which would be the worst single-quarter decline in modern US economic statistics. The question is how long will the virus last – and how quickly things will bounce back afterwards.
“They hit the major markets to keep credit flowing,” Donald L. Kohn, who was the Fed’s vice chairman during the 2008 financial crisis, said of the Fed’s actions on Monday.
The crux, he said, is “to prevent permanent damage”.