Fed unveils emergency lending program to shore up credit markets

WASHINGTON >> The Federal Reserve on Tuesday took another step to try and prop up the American economy, saying it would begin buying up a type of shortterm debt companies use for funding, known as commercial paper, to help keep credit flowing to households and businesses.

The program, enacted using the Fed’s emergency lending powers, pulls a page from the central bank’s 2008 financial crisis playbook and is an attempt to keep the economy and financial system functioning by backstopping a market that some of America’s biggest companies use to raise cash.

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.”

Mnuchin said on Tuesday 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.

“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.

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 has also sweetened the terms of its socalled 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. 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.