Fed makes strongest bid yet to protect firms, governments

WASHINGTON » The Federal Reserve is unleashing its boldest effort yet to protect the U.S. economy from the coronavirus by helping companies and governments pay their bills and survive a devastating crisis.

With lending in Treasury and mortgage markets threatening to shut down, the Fed announced an aggressive set of programs Monday to try to smooth out those markets. To do so, it committed to buy as much government-backed debt as it deems necessary. And for the first time ever, the Fed said it plans to buy corporate debt, too.

Its intervention is intended to ensure that households, companies, banks and governments can get the loans they need at a time when their own revenue is fast drying up as the economy stalls.

The Fed’s all-out effort to support the flow of credit through an economy ravaged by the viral outbreak has now gone beyond even the extraordinary drive it made to rescue the economy from the 2008 financial crisis.

“The coronavirus pandemic is causing tremendous hardship across the United States and around the world,” the Fed said in a statement. “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

The announcement initially lifted stocks in early trading. But rancorous talks in Congress over a $2 trillion rescue package — and uncertainty over when any agreement might be reached — depressed shares about 2.5% in volatile midday trading. The yield on the 10-year Treasury bond fell, a sign that more investors are willing to purchase the securities.

With its new programs, the Fed, led by Chair Jerome Powell, is trying to both stabilize the economy and allay panic in the markets. As the need for cash has escalated among many corporations and

city and state governments, large businesses have been drawing as much as they can on their existing borrowing relationships with banks.

The intensifying need for money means that banks and other investors are seeking to rapidly unload Treasuries, shortterm corporate debt, municipal bonds and other securities. The Fed’s move to intervene as a buyer of last resort is intended to supply that needed cash.

The central bank’s actions increase pressure on Congress to approve an agreement that would include funds to backstop the Fed’s lending. Many economists say that whatever financial support Congress eventually provides will likely be even more important than the Fed’s intervention. And they warn that such fiscal help needs to come soon. The Fed’s intervention is not a substitute for fiscal stimulus,” said Joseph Gagnon, a former Fed economist who is now senior fellow at the Peterson Institute for International Economics. “Let’s hope Congress passes something quickly.” Joe Brusuelas, chief economist at RSM, a tax and advisory firm, said that if Congress can pass the legislation and have it signed into law by Tuesday, banks could start making loans to small and medium-sized businesses, with the Fed’s support, by Friday. In its announcement Monday, the Fed said it will establish three new lending facilities that will provide up to $300 billion by purchasing corporate bonds, a wider range of municipal bonds and securities tied to such debt as auto and real estate loans. It will also buy an unlimited amount of Treasury bonds and mortgage-backed securities to try to hold down borrowing rates. The central bank’s gofor-broke approach is an acknowledgment that its previous plans to keep credit flowing smoothly wouldn’t be enough in the face of the viral outbreak, which has brought the U.S. economy to a near-standstill as workers and consumers stay home. Last week, it said it would buy $500 billion of Treasuries and $200 billion of mortgage-backed securities, then quickly ran through roughly half those amounts by week’s end. And on Monday, the New York Federal Reserve said it would buy $75 billion of Treasuries and $50 billion of mortgage-backed securities each day this week. “They’re really setting the economy up” to start functioning again when the health crisis subsides, said Donald Kohn, a former Fed vice chair who is a senior fellow at the Brookings Institution. “Part of this is about the other side of the valley: Make sure the credit is there.” Kohn noted that it would take time to set up some of the Fed’s programs, but just knowing that they are on the way should reassure businesses. Many companies seeking loans are worried about cash flow as their revenue dries up along with their customers. Elizabeth Cooper McFadden, who runs Novella Brandhouse, a marketing firm in Kansas City, Missouri, has applied for a disaster loan from the Small Business Administration. But she’s concerned about how long that loan will take to be processed and wonders if the Fed program might be faster. She will need more money in the next 30 to 60 days. McFadden would also like to see more lenient terms than SBA loans allow. “We’re looking at any and all options,” she said, adding, hopefully: “I feel that 90 days from now, it’s going to be a different picture — in a positive way.” The Fed mostly creates the money it will use to buy bonds and lend to large and small businesses. But it seeks to avoid credit losses. It has been using money from a Treasury fund to offset any losses on its loans. That fund has already committed most of that money to the Fed’s existing facilities. The congressional legislation could boost that amount by about $500 billion. “The steps announced today, combined with the previous ones ... should substantially improve market functioning and should provide some important support for the economy,” said Roberto Perli, a former Fed economist who is now head of global policy research at Cornerstone Macro. But Perli cautioned that the benefits won’t be felt immediately. “The next couple of quarters will still be probably bad,” he said.