Fed pours $2.3 trillion into U.S. economy

The Federal Reserve will buy $2.3 trillion worth in debt to support the U.S. economy.

Martin Crutsinger reported the news for the AP:

The Federal Reserve unleashed a new series of moves Thursday to try to make loans available to states, localities and companies that have been hard hit by the coronavirus.

In doing so, the Fed will pump an additional $2.3 trillion into the U.S. economy. The central bank, in part, is drawing on money made available in Congress’ new economic relief package to buy municipal bonds as well as debt that did not previously qualify for federal backing.

The extraordinary rescue package comes on top of efforts the Fed has already made to bolster the economy, including cutting its benchmark interest rate to near zero and supplying more than $1 trillion to purchase Treasury and mortgage-backed securities to help keep credit flowing.

On the same day that the number of Americans seeking unemployment benefits reached 16.8 million in just the past three weeks, Chairman Jerome Powell said the Fed fully intended to use its powers “forcefully, proactively and aggressively until we are confident that we are solidly on the road to recovery.”

Greg Robb and Sunny Oh from MarketWatch wrote:

The cornerstone of today’s actions is a new $600 billion “Main Street Lending Fund” to offer support for small and mid-sized businesses who will have to pay between 2.5% to 4% above the secured overnight funding rate, which stands at zero.

The plan is to offer 4 -year loans to companies, with principal and interest payments deferred for one year. The loans will be originated by banks, who will retain a 5% share and sell the rest to the Fed’s facility.

Another facility set up Thursday will purchase up to $500 billion of short-term notes directly from states, counties and cities, though the Fed said details on the cost of borrowing will be released later.

The Fed stopped short of setting up a facility to buy muni-bonds from the market, saying only that it would continue to “closely monitor” that market. This suggests the Fed may act in the sector in the future.

Krishna Guha, a former Fed staffer and now vice chairman of Evercore Financial, said he thought the Fed wasn’t done.

“Both the Fed’s repeatedly escalating credit market actions and chair Powell’s comments in a Brookings webcast today send a clear signal that if what was announced today is not enough the Fed will come back with more,” Guha said, in a note to clients.

Reuters’ Howard Schneider reported:

It may prove to be the Fed’s most groundbreaking step yet in the battle against the economic fallout from a health crisis that has seen a record-shattering 16.8 million people file for unemployment benefits in just three weeks and seen untold numbers of businesses forced to shutter under social distancing rules.

As the pandemic advanced, the Fed set aside inhibitions about inflation, political blowback and other risks that arguably slowed its response to the 2007 to 2009 crisis, and in a matter of weeks has sequentially extended safety nets to different parts of the economy. On Thursday it added help for some key remaining constituencies – small firms, mid-sized industries, local governments, and even corporations which might find their credit standing downgraded because of a fast-evolving economic downturn.

Fed Chair Jerome Powell said the demands of the crisis have led the central bank to broaden its role beyond the usual focus on keeping markets “liquid” and functional, to helping the United States get the economic and financial space it needs to fix a dire health emergency.