All Posts Tagged: CARES Act
The Federal Reserve, as lender of last resort, is stepping into the fixed income and credit markets to extent that has never been seen, even at the height of the global financial crisis more than a decade ago.
The Federal Reserve believes these emergency measures are necessary today given the severe economic and financial dislocations occurring because of the COVID-19 pandemic.
The Fed announced on Thursday, April 9th a number of new lending facilities, enabled by the financial backing of Congress and the Treasury, and expanded the scope of existing ones to intensify its support to businesses of all sizes, states, counties, municipalities, and improve the functioning of the high-yield and corporate debt markets.
The Fed believes these facilities and lending programs could add another $2.3 trillion in support to businesses and vulnerable areas of our financial system. The goal is to keep the credit channel open and businesses and municipalities solvent despite unprecedented levels of unemployment and business closures.
How bad is the economic and financial damage tearing across our communities? To give you a taste, over the last three weeks alone initial jobless claims in the U.S. have totaled a shocking 16.8 million claims. This equates to a U.S. unemployment rate of around 13.9% as of last week up from 3.5% in February. We are forecasting another 6.0 million initial claims next week which would bring the U.S. unemployment rate up to around 17.0%.
If realized in April, an unemployment rate of this magnitude would surpass anything the United States has seen outside of the Great Depression of the 1930s. This is the Federal Reserve’s do whatever it takes moment. Jay Powell, speaking via webcast to the Brookings Institution, said the Federal Reserve will use its powers “forcefully, proactively and aggressively” until the economy recovers.
The list of new and expanded facilities announced by the Fed yesterday will provide an important and critical level of lending support to businesses, financial institutions, and state and local governments.
The Fed announced the details on a new Main Street Lending Program, designed to increase lending to small and mid-size businesses with up to 10,000 employees and less than $2.5 billion in revenue. The loan program will offer loans of up to 4 years with principle and interest deferred for the first year.
Businesses must make reasonable efforts to maintain payrolls and need to follow compensation, dividend, and stock repurchase restrictions. The Fed pledging to purchase up to $600 billion in loans through this Main Street facility. Banks will retain 5% of the loan with 95% being sold to the Federal Reserve.
The Fed also set up a new $500 billion Municipal Liquidity Facility (MLF) buying short-term notes directly from states, counties of over 2 million people, and cities of over 1 million people. The Fed will continue to monitor the primary and secondary municipal debt market and may take further actions of support in the future.
The Fed also expanded the size and scope of its Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and Term Asset-Backed Securities Loan Facility (TALF) to support $850 billion in credit. The TALF will now accept AAA CMBS and newly issued CLOs as collateral for the $100 billion facility.
The Fed will also offer financial institutions term financing to help them originate small business loans through its existing Paycheck Protection Program, calling it the Paycheck Protection Program Liquidity Facility. The Fed will be taking the originated small business loans as collateral.
The Federal Reserve has already taken extraordinary actions over the last few weeks by dropping interest rates to near zero and aggressively expanding their purchases of Treasuries and mortgage backed securities. The Fed balance sheet has expanded to around $5.9 trillion up from around $3.6 trillion last September.
But as Jay Powell mentioned when he announced the new and expanded credit and liquidity facilities, the Fed only has lending powers, and many state and local governments, businesses, and households will also require Federal spending support that only Congress can appropriate in the quarters ahead.
To see our latest economic and interest rate forecasts, check out this week’s U.S. Outlook.
==Read More ›