To prevent an economic depression, the Fed announced that it would support an unprecedented range of credit for households and small businesses.
As the coronavirus continues to spread, the Fed announced that it would support an unprecedented range of credit for households, small businesses, and major employers in order to prevent an economic depression, therefore, creating new programs for the nearly 5,200 FDIC- insured U.S. banks, as well as finance companies and corporations, to stave off bankruptcies and ensure that employees across the country are paid.
The measures include lending against student loans, credit card loans, and U.S. government backed-loans to small businesses, as well as programs to purchase bonds from larger employers and make loans to them. It marks a major intervention by the Fed into the real U.S. economy to prevent it sliding into a depression. The central bank’s all-out push, per CBS News, has now gone beyond even the extraordinary drive it made to rescue the economy from the 2008 financial crisis.
“The coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said in a statement. “Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. 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.”
In its announcement, the Fed said it will establish three new lending facilities that will provide up to $300 billion by purchasing corporate bonds, a wider range of municipal bonds, and securities tied to such debt as auto loans and real estate loans. Many of the details are yet to be finalized, but here are the Fed’s three principal goals and how it intends to carry them out:
1) Help large companies stay in operation
Companies large and small are suffering as factories shut down, retail stores close, and business transactions overall stutter to a halt. Through the newly created primary market corporate credit facility, the Fed will act as a backstop for corporate debt issued by highly rated companies.
To do this, the Fed will lend to a special authority which will then buy bonds and issue loans to companies. The goal in this case is to provide cheap loans to large and medium-sized companies to help them cover business expenses and stay in operation for as long as it takes.
2) Keep loans available for households and businesses
Through the Term Asset-backed securities Loan Facility (TALF), the Fed is accepting bundled groups of assets secured by auto loans, credit cards, student loans, and other types of credit. The intention behind the program is to reduce risks for banks and make it easier for them to keep issuing new loans to consumers and businesses.
The TALF will also support certain small business loans that are backed by the Small Business Administration. Nevertheless, some small businesses may not qualify for the loans, which require businesses to be a certain size and to have been in operation for a minimum amount of time.
3) Main Street lending program
The Fed said Monday that it will also support loans to small and medium-sized businesses, complementing programs offered by the Small Business Administration, although the initiative is yet to be formally unveiled. This program, which could be executed in conjunction with the U.S. Treasury Department is likely intended to offer more direct help to businesses hit by the ongoing crisis.