The Fed goes all-in with new, unlimited bond-buying plan

The Federal Reserve will buy bonds as needed to calm markets, and will buy corporate debt in a series of emergency lending programs.

  • By Jeanna Smialek,
  • The New York Times News Service
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The Federal Reserve said it would buy as much government-backed debt as needed to soothe fraught markets and unrolled a series of programs meant to shore up both large and small businesses, unveiling a whatever-it-takes effort to cushion the brutal economic blow of coronavirus.

“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,” the central bank said in a Monday morning statement, adding that “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, which restarted its massive bond-buying program eight days ago, said it would expand well beyond the $700 billion in Treasury and $200 billion in mortgage-backed securities the Fed initially said it would buy. Instead, officials will buy bonds “in the amounts needed to support smooth market functioning” — including buying government-backed debt tied to commercial real estate.

The program, which is explicitly unlimited, is a nod to the fact that crucial markets at the center of the financial system have struggled to function in spite of the Fed’s efforts to date. The central bank also announced that it will wade into corporate bond purchases for the first time and committed to a new small business lending program, going far beyond its playbook from the 2008 financial crisis.

The scope of the package is a clear indication that the Fed is throwing its full weight at confronting the economic fallout from the coronavirus, which poses a severe threat as factories shut down, people lose jobs and the economy grinds to a halt. It comes as lawmakers in Congress continue to struggle to find a fiscal response.

The situation has been particularly painful for both large and small businesses, whose shops or airplanes or hotels are suddenly empty. Many of those businesses will need financing to survive, including loans and willing buyers of its outstanding debt.

The Fed’s plan to bolster the corporate bond market, which has been under pressure as companies shut down in the face of the virus, is without precedent. The central bank has never before bought longer-dated corporate debt. The two new programs, both of which are established using the Fed’s emergency lending powers, will help companies fund themselves and ease the trading of corporate debt in the secondary market.

One of them, the Primary Market Corporate Credit Facility, is open to investment-grade companies and will provide bridge financing of four years, according to the release. It will both purchase bonds from eligible issuers and extend loans through a special purpose vehicle. The other program, the Secondary Market Corporate Support Facility, will purchase already-issued debt, which has become hard to trade.

The Fed said the programs are intended “to support credit to large employers.”

Fed officials are also taking measures to support smaller businesses, resurrecting a program from the 2008 financial crisis, called the Term Asset-Backed Securities Loan Facility or TALF, that encouraged loans to small businesses and households. It added a new program, the Main Street Business Lending Program, saying that it would “support lending to eligible small-and-medium sized businesses,” but giving few details as to how.

The fresh programs “taken together, will provide up to $300 billion in new financing,” the central bank said.

The Fed’s Monday morning announcements came as markets braced for a tumultuous day and as Congress struggled to agree on a spending package to support the United States economy.

Congressional leaders and the Trump administration remained locked in negotiations on Monday morning, in hopes of finding agreement on a fiscal response to the virus that could approach $2 trillion, including assistance for workers, corporations and small businesses, and direct payments to low- and middle-income families.

Democrats voted down a Republican effort on Sunday evening to proceed to a vote on the fiscal bill before negotiations were complete, after days of talks yielded consensus in some areas but divisions in others — most notably the details of a $500 billion effort to extend loans and other aid to large corporations. The negotiations then resumed and stretched into the early morning on Monday, with Democratic leaders and Steven Mnuchin, the Treasury secretary, reporting progress but no final deal.

The Senate was set to begin another series of procedural votes around noon on Monday.

The Fed had already been acting almost daily to shore up the economy and keep markets functioning as coronavirus spreads, shutting down huge swathes of the United States and global economy and threatening to plunge the world into a deep and painful recession.

The central bank slashed interest rates to near-zero just over a week ago. In the days since, it ramped up the size of its liquidity injections — meant to keep the market for short-term loans between banks functioning normally — and sped up the pace of its Treasury and mortgage-backed security purchases.

The Fed had also announced several emergency lending programs, which allow it to backstop markets during especially unusual and demanding circumstances. The Fed is buying commercial paper, a type of short-term debt companies use to fund themselves, to keep that market functioning smoothly. It has backstopped money market mutual funds, which both businesses and companies use to stash cash, including ones that invest in municipal debt.

It expanded those on Monday, saying it would accept a wider range of securities — including municipal variable rate demand notes and certificates of deposit — as collateral in its mutual fund backstop. And it said it would include high-quality, tax-exempt commercial paper in that program.

The Fed’s overarching goal is to keep the economic shock caused by coronavirus — which is sure to be steep, but which could prove short — from turning into a full-blown financial crisis that interrupts the flow of credit to businesses and households that need it.

Making sure that markets remain functional is crucial, because the economic hit from coronavirus is going to be substantial even without the accelerant of a financial meltdown. The virus has closed schools, emptied factories, and led to mass layoffs — the United States economy has ground to an abrupt standstill.

Economists at Goldman Sachs estimate that growth could contract by 24 percentage points in the second quarter.

“A decline of this magnitude would be nearly two-and-a-half times the size of the largest quarterly decline in the history of the modern GDP statistics,” they wrote in a note on Friday. “The sudden stop in U.S. economic activity in response to the virus is unprecedented.”

They see a 3.8 percent decline in output for the full year, following a recovery in the second half. The scale of the problem means that even as Congress readies its own response, the Fed is likely to continue trying to calm falling markets and attempting to blunt the real-economy impact.

“The Fed has already done a lot, and will remain creative in trying to do more,” economists at J.P. Morgan wrote in a note last week.

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