As unemployment skyrockets and businesses struggle to cover rent and payroll, the odds are rising that short-term layoffs turn into long-term joblessness as employers shut down. At its worst, the United States could fall into an economic depression.
The Federal Reserve is supposed to stand between America and that abyss.
Congress earmarked $454 billion for Federal Reserve programs that are meant to keep credit flowing to businesses, states and local governments — and while it remains unclear exactly how those funds will be used, the central bank has provided a rough road map.
During troubled times, the Fed can lend more or less directly to companies and governments using its emergency authorities. Treasury Secretary Steven Mnuchin must sign off on the programs and — because the Fed is supposed to avoid taking on credit risk — the Treasury Department backstops the programs with a layer of funding meant to absorb losses.
That’s exactly what the new $454 billion is meant to do: It will back up Fed lending programs that could extend more than $4 trillion worth of credit. While it is uncertain exactly who will benefit, the Fed and lawmakers have given America strong hints — officials had already announced seven detailed lending programs, five of them backed with cash from an existing Treasury Department fund. Congress asked for two more in the legislation President Trump signed last Friday.
If they work, the programs could touch almost every facet of economic life, helping households, small businesses, local governments and money market funds, where a lot of people park their savings, along with more obscure parts of Wall Street’s financial plumbing. Here’s what we know.
Will the Fed help my family?
Yes, but it’s mostly indirect.
The Fed is rolling out one lending program that gives eligible companies cheap loans in exchange for asset-backed securities — basically, bundles of debt — built on newly issued credit card debt, student loans, auto loans and the like. By creating a big incentive, the program should make loans available and cheaper for consumers. That effort, announced March 23, is backed by $10 billion, so the new appropriation could allow for expansion in size, and, potentially, in what collateral is accepted.
In addition to its emergency programs, the Fed had slashed interest rates to nearly zero and is buying massive quantities of bonds, two policies that should help keep borrowing cheap for families who want to buy a new car or refinance their house. That’s only mildly useful while much of America remains under quarantine, but it could help the economy bounce back once the coronavirus is under control.
Will it help small businesses?
Yes, but the Fed is not the key player here.
Treasury and the Small Business Administration are in charge of overseeing Congress’ primary solution for smaller companies, a program of $349 billion in loans that businesses with 500 or fewer employees can use to cover payroll and other expenses. Most, if not all, of those loans will be forgiven if the borrower retains its workers and doesn’t cut their wages.
The Fed will provide backup. The program that helps to support credit card and student loans also accepts bundles of business-related loans, so it could help smaller companies access financing.
And the central bank has promised another resource — the Main Street Business Lending Program — that officials say will help businesses that are too big to qualify for small business loans but too small to have easy access to capital markets.
That was unveiled March 23, but the Fed has yet to detail how it will work or how much money will stand behind it. Eric Rosengren, president of the Federal Reserve Bank of Boston, told Bloomberg on Wednesday that it’s in the design phase and a roll out could be a “another couple” of weeks away.
The coronavirus response law instructs Treasury Secretary Steven Mnuchin to ask Fed Chair Jerome H. Powell if he would consider a program that provides financing to banks to make cheap loans to companies with 500 to 10,000 employees. The Main Street program could check that box.
Do big corporations get a lot of help?
Big companies with solid balance sheets benefit in several ways.
The Fed’s emergency lending has an overarching goal: it is supposed to help markets function smoothly. Corporate debt has been rocked by the coronavirus spread. Companies found themselves in need of cash as restaurants closed, movie theaters went dark and tourism essentially dried up. But because they had become riskier and markets were in meltdown, fewer investors were willing to buy their bonds.
The Fed has unveiled several programs to help. One supports a type of short-term funding, known as commercial paper, and another that buys company debt secondhand. A third program buys newly issued debt or makes direct loans to corporations.
The programs go well beyond what the central bank did for companies in 2008, but all focus on investment-grade debt. They mostly leave companies with shakier prospects out in the cold. Doing so avoids rewarding firms that have piled on debt while buying back shares or making acquisitions, but also deepens the rift between stable companies and their riskier counterparts.
Could the Fed help my local government?
The Fed has unveiled a couple of programs that are helping municipal bond markets by allowing banks to use some types of local debt as collateral for cheap loans.
But officials have stopped short of buying local debt outright, and many lawmakers are urging them to think bigger. Designing a direct-purchase program is no easy task for the Fed, because state and local debt markets are complicated — and direct purchases could leave the Fed boosting some places, like New York State, while leaving others, like Detroit, with little help.
How big will this be?
It could be well in excess of $4 trillion, but it might not. Treasury funding has been scaled up about 10 times so far, but some future projects are likely to be riskier, and any program catering to less-safe companies might require more insurance from the Treasury Department. If that’s true, the dollars can be leveraged fewer times.
It could also be the case that America’s banks and businesses do not demand $4 trillion in loans, in which case some of the pool could go untapped.
What’s the timing?
Short answer: Mr. Powell himself probably doesn’t know. The timeline hinges on how quickly the Fed can figure out America’s needs, determine how best to meet them, and set programs up. The initiatives are legally and practically complex, so they can take a while: the project that targets the commercial paper market was announced on March 17 is still not operational. Others are already in action.
Is it enough?
That’s the $4 trillion question. Because it is unclear how long the coronavirus is going to last, it is also unclear how much lending will be needed. Design could also matter a lot here: If the programs are poorly targeted or have too many strings attached and companies won’t use them, even seemingly-hefty programs might do little to help the economy.
It’s also unclear how the pie will be divided. So far, $30 billion in pre-existing Treasury funding backs programs for big companies, $10 billion backs the program for households and small businesses, and $10 billion backs a program for money market mutual funds, which touch both big businesses and ordinary families. (One program, focused on the plumbing of the banking system, does not require Treasury backing.)
Is there oversight?
“I will be watching your actions carefully,” Senator Elizabeth Warren warned Mr. Powell and Mr. Mnuchin in a letter on Tuesday.
The Massachusetts Democrat isn’t alone. Members of both parties are keen on making sure the Treasury and Fed use the money carefully. There is a special inspector general overseeing the Treasury’s actions, and an oversight commission will keep an eye on how Treasury and Fed funds are used. Mr. Powell and Mr. Mnuchin must keep lawmakers appraised on what programs are being put into place and who they are benefiting. Both will be required to testify regularly.
The question is how much that oversight will matter. The programs are complicated, and the design is happening behind closed doors. While it’s hard for companies to get special treatment individually because the programs are broad, that could open the door to lobbying for the inclusion of broad asset classes — like lower-grade debt.
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