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| Fed Unveils Emergency Lending Program to Shore Up Credit Markets | Fed Unveils Emergency Lending Program to Shore Up Credit Markets |
| (about 5 hours later) | |
| WASHINGTON — The Federal Reserve took a series of steps to prop up the American economy on Tuesday, saying first that it would begin buying up a type of debt companies issue for short-term cash and then, later in the day, establishing a lending program meant to help the banks at the core of the financial system function smoothly. | |
| Both were efforts to keep credit flowing to business and households. | |
| Taking a page from its 2008 financial crisis playbook, the Fed said it would backstop the $1.13 trillion market for commercial paper, a key funding source used by companies to cover payroll and day-to-day operations. That market, used by firms like Pfizer, Royal Dominion and DuPont, has started to come under strain as businesses raced to fill up their coffers in the face of quarantines, shuttered shopping centers and empty restaurants. | |
| Not long after, it said it would roll out a new Primary Dealers Credit Facility, similar to a program it unveiled in 2008 as a short-term funding market used by primary dealers — banks that are key conduits between the Fed, Treasury Department, and broader financial system —- showed strains. | |
| “The facility will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households,” the Fed said of the new program. | |
| Both programs were enacted using the Fed’s emergency lending powers and are an attempt to keep the economy and financial system functioning. | |
| Banks and companies have been issuing commercial paper to shore up their coffers as coronavirus leads to quarantines, shutters shopping centers and closes restaurants. But hardly anybody has been buying the debt. | Banks and companies have been issuing commercial paper to shore up their coffers as coronavirus leads to quarantines, shutters shopping centers and closes restaurants. But hardly anybody has been buying the debt. |
| Treasury Secretary Steven Mnuchin, whose department will provide $10 billion of credit protection to the Fed using the Treasury’s Exchange Stabilization Fund, said the facility would allow the central bank to buy about $1 trillion worth of commercial paper “as needed.” | |
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| Mr. Mnuchin, speaking at a news conference on Tuesday, said while the Fed may not need to purchase that total amount, the facility “has already created significant stability in the market today.” | |
| The Fed program will use a special vehicle to buy unsecured and asset-backed commercial paper from eligible companies, according to a statement by the central bank. That should benefit financial firms and ordinary businesses alike. | The Fed program will use a special vehicle to buy unsecured and asset-backed commercial paper from eligible companies, according to a statement by the central bank. That should benefit financial firms and ordinary businesses alike. |
| “Commercial paper markets directly finance a wide range of economic activity,” the Fed said, noting that they supply “credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies.” | “Commercial paper markets directly finance a wide range of economic activity,” the Fed said, noting that they supply “credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies.” |
| The commercial paper market has been under serious strain in recent days, which the central bank noted in its release. The program should act like an escape valve, snapping up notes to keep cash flowing, much as it did during the 2008 financial crisis, when credit markets largely froze. | The commercial paper market has been under serious strain in recent days, which the central bank noted in its release. The program should act like an escape valve, snapping up notes to keep cash flowing, much as it did during the 2008 financial crisis, when credit markets largely froze. |
| In order to set the program up, the needed to declare that the economy faces “unusual and exigent” circumstances, allowing it to use its special lending abilities under section 13(3) of the Federal Reserve Act. | In order to set the program up, the needed to declare that the economy faces “unusual and exigent” circumstances, allowing it to use its special lending abilities under section 13(3) of the Federal Reserve Act. |
| The Fed’s move comes on the heels of the sweeping actions its took on Sunday, when it slashed rates nearly to zero and announced a program to buy up government debt and mortgage-backed securities. Those purchases are also meant to ease strained markets, including that for Treasury securities — which had become hard to trade, a problem because they are in many ways the backbone of the financial system. | The Fed’s move comes on the heels of the sweeping actions its took on Sunday, when it slashed rates nearly to zero and announced a program to buy up government debt and mortgage-backed securities. Those purchases are also meant to ease strained markets, including that for Treasury securities — which had become hard to trade, a problem because they are in many ways the backbone of the financial system. |
| The Fed has also sweetened the terms of its so-called discount window, which allows banks to tap short-term loans from the Fed. It has encouraged big banks to begin using the program, in an attempt to overcome stigma associated with using the discount window, and the nation’s biggest banks said on Monday night they had each utilized the program. Regulators have also been providing limited regulatory relief to banks to keep credit flowing. | The Fed has also sweetened the terms of its so-called discount window, which allows banks to tap short-term loans from the Fed. It has encouraged big banks to begin using the program, in an attempt to overcome stigma associated with using the discount window, and the nation’s biggest banks said on Monday night they had each utilized the program. Regulators have also been providing limited regulatory relief to banks to keep credit flowing. |
| In the wake of the 2008 financial crisis, they had forced big banks to hold on to trillions of dollars in assets that are very easy to trade in case a crisis forced them to raise cash quickly. On Tuesday, regulators told the banks they can start to sell off some of those instruments and encouraged them to use the cash to lend to struggling businesses. | In the wake of the 2008 financial crisis, they had forced big banks to hold on to trillions of dollars in assets that are very easy to trade in case a crisis forced them to raise cash quickly. On Tuesday, regulators told the banks they can start to sell off some of those instruments and encouraged them to use the cash to lend to struggling businesses. |
| But investors have been clamoring for more, especially as the commercial paper market seized up. | But investors have been clamoring for more, especially as the commercial paper market seized up. |
| “This Fed facility ensures that companies can get the overnight funding they need to meet short-term obligations like payroll,” said Ernie Tedeschi, policy economist at Evercore ISI, calling it “obviously a positive step, obviously necessary.”“The only surprising thing is that it took them this long to do it,” he said. | “This Fed facility ensures that companies can get the overnight funding they need to meet short-term obligations like payroll,” said Ernie Tedeschi, policy economist at Evercore ISI, calling it “obviously a positive step, obviously necessary.”“The only surprising thing is that it took them this long to do it,” he said. |
| As companies have struggled to raise cash by issuing commercial paper, it has threatened to set off a chain reaction. Firms have been drawing on lines of credit and pulling money from prime money-market mutual funds to secure cash. Those money funds — low-yield, safe investment vehicles — need to sell their commercial paper holdings to give back cash, but that’s hard to do in a barely functioning market. | As companies have struggled to raise cash by issuing commercial paper, it has threatened to set off a chain reaction. Firms have been drawing on lines of credit and pulling money from prime money-market mutual funds to secure cash. Those money funds — low-yield, safe investment vehicles — need to sell their commercial paper holdings to give back cash, but that’s hard to do in a barely functioning market. |
| As investors and corporations become concerned about the availability of cash, it could trigger an even bigger rush for it. That’s putting pressure on banks to free up their own liquidity to meet demand, which keeps them from serving as an intermediary in other crucial markets. The result is that the gears of the financial system are beginning to get stuck, hampering trading in everything from Treasuries to corporate debt. | As investors and corporations become concerned about the availability of cash, it could trigger an even bigger rush for it. That’s putting pressure on banks to free up their own liquidity to meet demand, which keeps them from serving as an intermediary in other crucial markets. The result is that the gears of the financial system are beginning to get stuck, hampering trading in everything from Treasuries to corporate debt. |
| “I think we’re either entering a financial crisis or already there,” Jon Hill, a rates strategist at BMO Capital Markets, said on Monday. | “I think we’re either entering a financial crisis or already there,” Jon Hill, a rates strategist at BMO Capital Markets, said on Monday. |
| The Fed’s many interventions — which also include daily efforts to keep overnight lending between banks and financial institutions functioning smoothly — seem to be helping. But they have yet to put out all of the fires. | The Fed’s many interventions — which also include daily efforts to keep overnight lending between banks and financial institutions functioning smoothly — seem to be helping. But they have yet to put out all of the fires. |
| “It’s on the mend,” said Gennadiy Goldberg, a rates strategist at TD Securities, who said conditions in funding and Treasury debt markets were still choppy on Tuesday. “But it’s not healed yet.” | “It’s on the mend,” said Gennadiy Goldberg, a rates strategist at TD Securities, who said conditions in funding and Treasury debt markets were still choppy on Tuesday. “But it’s not healed yet.” |
| Alan Rappeport contributed reporting from Washington, Emily Flitter from New York. | Alan Rappeport contributed reporting from Washington, Emily Flitter from New York. |