Saying that the U.S. economy is deteriorating “with alarming speed,” Federal Reserve Chair Jerome Powell unveiled a new Fed program to supply more than $2 trillion in new loans to small, medium and large companies as well as cash-strapped states and cities. “Our emergency measures are reserved for truly rare circumstances, such as those we face today,” Powell said. “There is every reason to believe that the economic rebound, when it comes, can be robust.”
In an unprecedented move the Federal Reserve will directly buy debt from large corporations and states. The central bank is responding to a worry that some companies will go bankrupt during the pandemic because they will not be able to borrow money in time, and that states will have to cut deep into essential services because they can’t borrow in the debt markets.
Essentially, then, the move is another attempt to make sure that credit keeps flowing.
“We need to have a plan nationally for reopening the economy. We all want it to happen as quickly as possible,” Powell said. “We all want to avoid a false start where we partially reopen and that results in a spike in coronavirus cases.” Powell didn’t give a number for how deep a recession he sees–some economists predict a 30% contraction in the U.S. economy in the April through June quarter. Powell only said the economy will be very weak. He is hopeful businesses around the nation can reopen, reviving the economy safely in the second half of the year. He urged caution about moving too quickly and triggering another spike in coronavirus cases and deaths. Treasury Secretary Steven Mnuchin has said the it’s possible that businesses can reopen in May. Powell said sometime after July is more likely.
The Fed will begin by purchasing up to $750 billion in corporate loans from big businesses that had at least an investment grade rating on March 22. (The date is important since it is before a new round of credit rating downgrades hit big retailers.) To help midsize companies, the Fed will purchase as much as $600 billion in loans from banks that would go to businesses with up to 10,000 employees. The loans are for four years. To aid small businesses, the Fed has agreed to backstop the Small Business Administration’s Paycheck Protection Program loans. Businesses with fewer than 500 employees are supposed to go to banks to get loans of up to $1 million.
Finally, the Fed plans to start purchasing up to $500 billion in short-term bonds from all 50 states, the District of Columbia, and large cities with more than a million people. Many states and cities have warned that they are about to run out of cash as tax revenues have all but dried up.
