NEW LENDING FACILITY WILL TRY TO EASE FLOW OF CREDIT

In its latest emergency action, the Federal Reserve is establishing a lending facility to try to ease the flow of short-term credit to banks and businesses as the economy grinds to a halt from the viral outbreak.

What’s happening

The Fed announced Tuesday it’s reviving a program it first used during the 2008 financial crisis to unclog a short-term lending market for what is known as “commercial paper.” Large businesses issue commercial paper — essentially IOUs — to raise cash to meet payrolls and cover other short-term costs. “An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak,” the Fed said in a statement.

Borrowing rates in the commercial paper market have been spiking as more companies have sought to raise cash in the expectation their revenue will plunge. At the same time, money market funds, among the largest buyers of the short-term loans, are seeking to sell commercial paper themselves. They need to raise money because they expect large institutional investors to withdraw funds.

Why it matters

All that activity made it harder for banks and other companies to raise the cash they need.

“The goal is to prevent a larger catastrophe that includes soaring bankruptcies, unemployment and underemployment,”said Joe Brusuelas, chief economist at tax advisory firm RSM.“... The Treasury will need to step up with other funds and bridge loans” that can help companies with lower credit ratings. Only companies with top credit ratings are eligible to borrow from the Fed’s new facility.

More details

The central bank said it set up the investment vehicle to buy commercial paper with the approval of the Treasury Department. The Treasury has also committed to guarantee up to $10 billion of the loans to prevent the Fed from taking losses. Companies that borrow through the facility will pay a small fee and interest.