The unprecedented nature of the coronavirus-induced shutdown of the economy calls for unprecedented steps to keep firms and state and local governments alive and ready to resume normal operations as soon as it is safe to do so. The latest action to that end came on April 9 when the Federal Reserve, in partnership with the Treasury Department, set up new emergency facilities and expanded existing ones with a combined lending capacity of $2.3 trillion, more than 10 percent of US GDP. The facilities can extend credit to businesses of all sizes plus hard-pressed states and localities, leveraging funds appropriated by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The April 9 action was the latest and largest of several Fed actions since March 2020 to reduce interest rates at all maturities, keep financial markets functioning normally, and extend credit throughout the US and global economies. Following are its elements.
- The Municipal Liquidity Facility will support lending to states and the District of Columbia, cities with a population exceeding 1 million residents, and counties with a population exceeding 2 million residents. States will be entitled to access funds to distribute to localities that are not directly eligible. The Treasury will provide $35 billion of equity capital to support a total lending capacity of $500 billion. Notably absent from the list of recipients is the territory of Puerto Rico, which is currently in default on its existing bonds.
- The Paycheck Protection Program (PPP) Lending Facility will provide cheap credit to banks that make loans to small businesses that are guaranteed by the Small Business Administration under the terms of the CARES Act. The loans that are made by banks to small businesses will be forgiven to the extent that recipient firms use them to maintain their payrolls and make rent, mortgage, and utility payments (with at least 75 percent used for payrolls). These loans will not count against banks’ regulatory capital requirements. PPP funds allocated by Congress are currently $350 billion, but congressional leaders are already talking about increasing funding for the PPP.
- The Main Street New Loan Facility and Main Street Expanded Loan Facility will purchase loans to small and medium-sized businesses that meet requirements set forward in the CARES Act. These facilities fill a gap between lending to the smallest businesses under the PPP and lending to larger businesses through the corporate credit facilities (see below). The Treasury will provide $75 billion of equity capital to support a total lending capacity of $600 billion.
- The Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility will buy corporate debt at issuance (primary market) and from existing investors (secondary market). The Treasury will provide $75 billion of equity capital to support a total lending capacity of $750 billion, up from an initial capacity of $200 billion. The corporate issuers must meet the requirements set forward in the CARES Act, have had an investment grade credit rating as of March 22, 2020, and not have fallen much below investment grade by the time of purchase.
- The Fed broadened the range of assets for purchase by the Term Asset-backed Securities Loan Facility but did not increase the size of this program, which is currently $100 billion and backed by $10 billion in Treasury equity.