Fed moves to backstop funding for US firms amid Covid-19 crisis

March 18, 2020 09:26
The US Federal Reserve has been forced to take several emergency actions over the past two weeks to shore up the economy amid disruptions caused by the coronavirus outbreak. Photo: Reuters

The US Federal Reserve moved Tuesday to ensure the flow of credit to US companies, banks and even local governments amid a nationwide scramble for ways to blunt the economic fallout from the coronavirus crisis, Reuters reports.

The central bank announced in the morning that it will reopen the so-called Commercial Paper Funding Facility to underwrite the short-term loans that companies often use to pay for their operations, a key financial market backstop first set up 2007 to 2009.

At day’s end it extended its reach as the economy’s lender of last resort to the two dozen Wall Street primary dealers who are critical to the functioning of bond and other financial markets.

By letting those companies pledge municipal bonds, corporate debt and equity securities as collateral for 90-day Fed loans, the Fed aims to keep credit flowing to parts the economy that may face an unfolding nationwide cash crunch, the report said.

The actions were approved by the US Treasury Secretary under emergency rules that broaden the Fed’s lending powers beyond the banks that are its usual customers.

The move came as officials sought to prevent public health steps such as business shutdowns from causing widespread economic harm.

Fed Chair Jerome Powell and House Speaker Nancy Pelosi discussed efforts that might be put into play by the Fed or other branches of the US government, according to a Pelosi spokesman.

Debates about other facilities were ongoing, and US elected officials were contemplating hundreds of billions of dollars of relief in the form of checks mailed to every household.

The US central bank has been forced to take several emergency actions over the past two weeks to keep the economy afloat. On Sunday, it slashed interest rates to near zero and pledged hundreds of billions of dollars in asset purchases.

The Fed may still have more to come, with policymakers voicing support for other types of lending, and the New York Fed expanding yet again the short-term funding it is making available to financial firms.

In comments to CNN International, Minneapolis Fed President Neel Kashkari said his expected outlook is for a “mild” recession, but nothing would be certain until the virus is under control.

“The question is are we going to follow the path of South Korea and Japan, which seem like they’ve done a good job so far managing the crisis without shutting down their economies? Or are we going to head to Italy and Spain, where we would have to shut down our economy effectively for the foreseeable future? That could lead to a very, very deep recession.”

Stress in the commercial paper market in recent weeks raised worries that the intensifying efforts made to slow the spread of the virus could leave companies stranded without cash flow or an easy and cheap way to borrow - forcing them towards layoffs or worse.

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