The Federal Reserve is leading the economic response to the coronavirus crisis, launching unprecedented action to support the economy and financial markets. Below is a summary of Fed actions:
1.RATE CUTS & QUANTITATIVE EASING (QE)
On March 15, the Federal Reserve slashed the Fed Funds Rate to zero and unveiled a new $700 Quantitative Easing (QE) program to ensure borrowers have ample access to credit during the coronavirus-induced economic crisis COVID-19 pandemic. On March 23, the Fed announced its asset purchases of Treasuries and mortgage-backed securities (MBS) would be open-ended.
In the four weeks following the announcement it would resume QE, the Fed grew its balance sheet by $1.7 trillion to $6.1 trillion. At its current pace, the Fed is making more than $300 billion of asset purchases per week and showing no signs of slowing down.
2.TREASURY-BACKED EMERGENCY LENDING
On March 27, President Trump signed into law Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2.2 trillion fiscal stimulus package that included $454 billion from the Treasury Department to support emergency lending from the Fed.
With the Treasury backstop, the Fed can use up to 10x leverage through a series of special purpose vehicles (SPVs) to buy high-quality bonds and issue loans. The result will up to $4.5 trillion of liquidity injected into corporate debt, short-term state and local debt, and loans to large and medium-sized businesses.
On April 9, the Fed provided further information on how it would deploy trillions of Treasury-backed liquidity:
A.MAIN STREET LENDING PROGRAM
The Fed will purchase of up to $600 billion in forgivable loans through the Main Street Lending Program in order to ensure credit flows to small and medium-sized businesses that were in good financial standing before the COVID-19 crisis. To be eligible, a company must employ less than 10,000 people or have annual revenue of less than $2.5 billion. Treasury will inject $75 billion of equity into an SPV to cushion against credit losses as appropriated by the CARES Act.
B.MUNICIPAL LIQUIDITY FACILITY
The Municipal Liquidity facility will provide up to $500 billion in lending to states and municipalities suffering under stress from the coronavirus pandemic. The SPV will buy municipal bonds of up to two
years’ in duration. All 50 states, the District of Columbia, counties with more than 2 million residents, and cities of more than 1 million will be eligible to receive loans. Treasury will provide $35 billion of credit protection as appropriated by the CARES Act.
C.PAYCHECK PROTECTION PROGRAM LENDING FACILITY (PPPLF)
The Paycheck Protection Program (PPP), created under the CARES Act, authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The loans are supported by the Small Business Administration (SBA) but managed by financial institutions.
The Fed created the Paycheck Protection Program Liquidity Facility (PPPLF) to bolster the effectiveness of the program by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses.
D.INCREASING SIZE AND SCOPE OF CORPORATE AND CONSUMER CREDIT FACILITIES
The Fed expanded the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF) in order to increase the flow of credit to households and businesses through capital markets during the COVID-19 pandemic. These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury.
Below is a summary of each facility:
i.PRIMARY MARKET CORPORATE CREDIT FACILITIES (PMCCF)
The PMCCF will provide bridge financing for four years to investment-grade companies via the issue of new bonds and loans. Borrowers may elect to defer principal and interest payments for six months, or longer at the Fed’s discretion. On April 9, the Fed expanded the program to include corporate bonds that were rated as investment grade as of March 22 but have since been downgraded.
ii.SECONDARY MARKET CORPORATE CREDIT FACILITIES (SMCCF)
Through the SMCCF, the Fed purchases corporate bonds and exchange-traded funds (ETFs) in the secondary or public market to stabilize conditions in the corporate bond market. On April 9, the Fed expanded the program to include corporate bonds that were rated as investment grade as of March 22 but have since been downgraded.
iii.TERM ASSET-BACKED SECURITIES LOAN FACILITY (TALF)
Through the TALF program, the Fed will buy bundles of assets secured by auto loans, credit cards, student loans, loans backed by the Small Business Administration and other types of credit. The goal of the program is to make sure banks and other lenders have ample cash to keep making loans to consumers and businesses during the COVID-19 crisis. On April 9, the Fed expanded the list of assets eligible for the TALF program to include triple-A rated tranches of both outstanding commercial mortgage-backed securities (CMBS) and newly-issued collateralized loan obligations (CLOs).
The Fed has taken additional steps to ensure the healthy functioning of capital markets during the pandemic:
3. REPO MARKET
The Fed began supporting the repo market in October 2019 and has since stepped up its support of overnight cash lending markets to offer almost unlimited support, including with foreign central banks.
4. DISCOUNT WINDOW
Banks in recent weeks have borrowed the most since 2009 from the Fed’s “discount window,” its lending tool of last resort, after policymakers lowered the rate charged on the funding to 0.25% and extended the length of the loans offered from one day to 90 days.
5. COMMERCIAL PAPER FUNDING FACILITY (CPFF)
The Fed will use an SPV to make purchases of commercial paper, an essential source of short-term funding for large companies. The market had come under strain amid worries that companies hit by efforts to slow the spread of the coronavirus would not be able to repay their IOUs.
6. PRIMARY DEALER CREDIT FACILITY (PDCF)
The Fed offers short-term loans to the two dozen Wall Street firms authorized to transact directly with the central bank. The program offers funding of up to 90 days to primary dealers. A similar program run from 2008 to 2010 only offered overnight loans.
7. MONEY MARKET MUTUAL FUND LIQUIDITY FACILITY (MMFLF)
This new facility is meant to keep the $3.8 trillion money market mutual fund industry functioning even when investors are withdrawing money at a fast clip. The tool offers loans of up to one year to financial institutions that pledge as collateral high-quality assets like U.S. Treasury bonds that they have purchased from money market mutual funds. The Fed indirectly encourages banks to buy assets from money market funds, reducing the odds that the funds will need to sell those assets at a loss to meet redemptions.
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