The Fed expands its emergency lending facilities again

March 23, 2020 5:15 PM
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PIIE/Jeremey Tripp

Faced with mounting dangers to the US economy, the Federal Reserve announced several new steps on March 23, 2020, to ensure adequate flows of credit through the financial system. These steps add to measures announced a week earlier by expanding the sectors of the economy to which the Fed is providing credit, going even further than the measures taken in the Great Recession of 2008–09. The initial size of the new facilities is only $300 billion, an amount too small given the magnitude of the problem. But the Fed rescue will most likely be expanded as Congress authorizes more funds for the Treasury Department to backstop the Fed. For now, it's important to get these facilities up and running.

First, the Fed removed limits on its purchases of longer-term Treasury securities and agency mortgage-backed securities (MBS), saying that they would be undertaken "in the amounts needed to support smooth market functioning." It also added agency commercial MBS to its existing purchases of residential MBS. MBS purchases are especially helpful in holding down mortgage interest rates for homeowners and businesses.

Second, the Fed established three new lending facilities, each of which has a lending capacity of $100 billion backed by $10 billion in capital from the Treasury's Exchange Stabilization Fund. The Primary Market Corporate Credit Facility will lend directly to investment-grade corporations and will allow interest payments to be postponed for the first six months of the loans, which will have a maturity of no more than four years. The Secondary Market Corporate Credit Facility will buy corporate bonds in the secondary market to ensure smooth functioning of that market. The Term Asset-Backed Securities Loan Facility will lend to a special purpose vehicle that will buy asset-backed securities with a maturity of up to three years. The securities may be backed by auto loans, student loans, credit card loans, and various types of secured loans to small businesses. The asset-backed facility is similar to the one used in 2009, but the corporate facilities have never been used before.

Third, the Fed expanded its Money Market Mutual Fund Liquidity Facility and Commercial Paper Funding Facility programs to lend against bank certificates of deposit and certain municipal securities. It also reduced interest rates charged in the commercial paper facility.

Finally, the Fed said it expects to announce soon another path-breaking facility, the Main Street Business Lending Program, in conjunction with the Small Business Administration. This program would extend credit to small and medium-sized businesses.