On Thursday, the Federal Reserve announced a monumental $2.3 trillion program to provide funds for businesses and municipal governments. To underscore its efforts, Jerome Powell, the chairman of the Federal Reserve, issued a statement: “The Federal Reserve’s role is to provide as much relief and stability as we can.” In addition, Powell expressed his hopes that the Fed’s actions will ensure that the eventual recovery is as vigorous as possible. In a Brookings webcast, Powell telegraphed that the Fed would do more if needed.
The timing of the Fed announcement followed shortly after the government reported that 6.6 million new jobless claims were filed last week, bringing the overall total to almost 17 million.
Analysts pointed out that our central bank has established new programs and expanded existing ones to keep markets functioning and support our economy.
The primary measure is an innovative $600 billion Main Street Lending Fund to support small and midsized businesses. Companies with fewer than 10,000 employees or less than $2.5 billion in revenues are eligible. The borrowing rate will vary between 2.5% to 4% above the secured overnight funding rate. Loans under this program will be four years with principal and interest deferred for one year. Commercial banks will originate the loans. To keep their “skin in the game,” the banks will retain a 5% share after selling the remainder to the Fed.
The Federal Reserve established for the first time in history a $500 billion facility to purchase municipal bonds of U.S. states, counties with at least two million residents, and cities with at least one million residents.
The Fed increased a previously established facility to acquire corporate bonds, collateralized loan obligations and commercial mortgage-backed securities.
The Fed will start buying the debt of sub investment-grade issuers under the condition that these companies possessed investment-grade ratings before March 23, 2020. This program hopes to alleviate concerns about large companies that have been downgraded.
To keep the bond markets liquid and lower borrowing costs, the Fed has cut the federal funds rates close to zero. It secured liquidity in the short-term credit markets by buying commercial paper. Corporations issue commercial paper that has maturities no longer than 270 days to fund ongoing activities such as paying salaries and accounts payable.
To shore up the credit markets, the Fed began lending directly to corporations and buying corporate bonds.
Despite taking extraordinary measures, the Fed will not be able to prevent the credit downgrades in a broad swath of industries such as travel, restaurants and the energy sector. Even some general obligation municipal bonds face downgrades as lower economic activity reduces tax revenues.
Former Federal Reserve Chairperson Janet Yellen on CNBC expressed the viewpoint that we will have a ‘U’ shaped recovery — a slow recovery over 12-24 months. She said: “The more damage of that sort is done, the more likely we are to see a ‘U.’ Yellen added: “When you see numbers that are of that order of magnitude, it becomes clear just how steep a decline we are suffering right now, and there is really no precedent for thinking about this.”
Former Federal Reserve Vice Chairman Blinder believes that our recession began in March. Blinder blames “fear of shopping” because of COVID-19.
We need to applaud loudly the expansionary monetary and $2 trillion fiscal efforts aimed at alleviating (not eliminating) the profound misery caused by the coronavirus. We reject the tight monetary policies of our Federal Reserve during the 1930’s. Those policies deepened and prolonged the Great Depression.
Bill Gates on CNBC put our problems in perspective: “No one should think that the government can wave a wand and all of sudden the economy is anything like it was before this happened.”
Originally published in the Sarasota Herald-Tribune
