Fed planning cash infusion of $2.3 trillion

Powell: Situation critical, but economy will bounce back

WASHINGTON — The Federal Reserve said Thursday that it would pump as much as $2.3 trillion more into critical segments of the U.S. economy, seeking to boost small- and mid-sized businesses, as well as state and local governments.

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 the U.S. economy registered 16.8 million jobless people in just the past three weeks, Fed chairman Jerome Powell said the central bank fully intends to use its powers “forcefully, proactively and aggressively until we are confident that we are solidly on the road to recovery.”

On Wall Street, the Dow Jones Industrial Average jumped 285 points, or 1.22%, to close out its best week in 45 years. As economically damaging as the coronavirus pandemic will be, Wall Street is starting to see a path forward

that was not clear a few weeks ago. Slowing infection rates, hefty government relief packages and the Fed’s efforts to calm the markets have helped ease investors’ minds.

Powell said the U.S. economy is in an emergency and is deteriorating “with alarming speed,” but also said there was “every reason to believe that the economic rebound, when it comes, can be robust” because the economy was doing well before the virus hit.

“People have been asked to put their lives and livelihoods on hold, at significant economic and personal cost,”

Powell said in a Brookings Institution webcast. “We are moving with alarming speed from 50-year lows in unemployment to what will likely be very high, although temporary, levels.”

Powell called for a national discussion about what it will take to reopen the economy, but he urged caution about moving too quickly and triggering another spike in coronavirus cases and deaths. Treasury Secretary Steven Mnuchin has said it’s possible businesses can reopen in May. Powell said sometime after July is more likely.

Richmond Fed President Tom Barkin said the economy can’t bounce back until people feel comfortable to go out again to restaurants, baseball games or concerts. He sees parallels to the 9/11 terrorist attacks and how unsafe people felt to fly until the government enacted major security overhauls. There will need to be some sort of equivalent for the pandemic, whether it’s a vaccine or an antibody test.

“We’re going to have to think hard about what are the things that will have to make us feel it’s safe to shop again or eat out again,” Barkin said in an interview.

After 9/11, President George W. Bush encouraged people to go out and spend as a form of patriotism, and the nation responded. But that is unlikely to work again, given that the health issues touch so much of the economy. Barkin said it will take some sort of national protocol, such as requiring people to wear masks in public and sit a certain distance apart at restaurants and on airplanes, to get consumer confidence high enough to spend again.

“I actually am more optimistic than many that we can get back to work,” Barkin said. “What I am more worried about is consumer demand.”

The Fed said Thursday that it was activating a Main Street Lending Program authorized by the CARES Act, the largest economic relief package ever passed by Congress. It includes a loan program for municipal governments, as well as additional support for the Paycheck Protection Program, which the Small Business Administration rolled out last week. The program provides loans to businesses with fewer than 500 employees.

The Main Street lending program “will make a significant difference for the 40,000 medium-sized businesses that employ 35 million Americans,” Mnuchin said.

The government’s pay protection plan for small businesses is off to a rocky start. Businesses have had difficulty getting banks to provide the loans. The banks have said the government has not made clear how they should process such loans, even what forms businesses are required to use.

The Fed on Thursday said it would purchase up to $500 billion of municipal bonds to help state and local governments borrow enough to cover day-to-day operations, from road repairs to hospital expansions.

Both state and local governments are facing precipitous drops in revenue as sales tax receipts plunge and millions of Americans lose jobs and pay less income tax. At

the same time, governments are facing rising social safety net costs, as the ranks of unemployment insurance and Medicaid recipients swell.

Yet the market for new municipal bonds dried up in late March, as investors dumped state and local bonds, as well as other securities, in a rush to hoard cash. That sent interest rates on municipal bonds soaring, nearly closing down the market. The Fed’s actions are intended to rejuvenate the $3.8 trillion market for municipal bonds and lower the rates state and local governments pay. That should help government agencies avoid more layoffs.

Responding to questions after his speech, Powell was not specific about when he thinks the recovery might begin, but he suggested the second half of this year.

“When the virus runs its course, we would expect there to be a fairly quick rebound as people go back to work,” Powell said. But he added that such an outcome depends on people “staying home and staying healthy” now.

Powell said he was not worried at present that all the money being supplied to the economy from the $2.2 trillion CARES Act and the Fed’s loan programs would fuel inflation.

He said inflation had been a concern among some when the Fed was conducting billions of dollars of bond purchases to support the economy after the 2008 financial crisis. But instead of higher inflation, the economy has gone through more than a decade of very low inflation, below the Fed’s 2% target.

Many of the support programs that the Fed is deploying amid the virus shutdown are similar to programs it utilized to support the economy after the 2008 financial crisis. But in many cases the Fed is going farther than it did in 2008 to back riskier types of credit.

In its Thursday announcement, the Fed said it would expand a credit backstop for new debt issued by highly rated firms to include “fallen angels” — companies that were investment grade in mid-March but have subsequently been downgraded from triple-B to double-B.

“The Fed has dramatically increased the scale of its prospective interventions,” said Krishna Guha, a former official with the Federal Reserve Bank of New York who is now with investment bank advisory firm Evercore.

The central bank did hint at its own limits Thursday, even as it redoubled its efforts. Some lawmakers, including House Speaker Nancy Pelosi, a Democrat, have been urging the central bank to “think big,” while others have worried that the funding going to the Fed would be used to “bail out” big companies.

Powell emphasized that the Fed cannot actually distribute money, just enable loans.

“These are lending powers, not spending powers,” Powell said. “The Fed is not authorized to grant money to particular beneficiaries.” Information for this article was contributed by Martin Crutsinger and Christopher Rugaber of The Associated Press; by Heather Long of The Washington Post; and by Jeanna Smialek of The New York Times.