Fed launches 2 emergency programs last seen in 2008 crisis
WASHINGTON » The Federal Reserve put in motion two emergency lending programs Tuesday that were last deployed in response to the 2008 financial crisis, aiming to ease the flow of credit to businesses and households struggling amid the viral outbreak.
The first, announced mid-morning, is intended to unclog a short-term lending market for what is known as “commercial paper.” Large businesses issue commercial paper, which is essentially the equivalent of an IOU, 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.
The second program is also intended to mostly assist the commercial paper market and allows a wider range of financial institutions to access short-term loans from the Fed — in this case investment banks and securities trading divisions of large banks. It also allows them to pledge a wider range of collateral in return for the loans. The funds will then mostly be used to purchase commercial paper.
Both are revivals of financial-crisis era programs, and were set up under the Fed’s authority to launch emergency credit programs with the approval of the Treasury Department. They are also intended to ensure banks and large companies can access the cash they need even as financial markets seize up as Wall Street grows increasingly convinced the economy is entering a recession. That gloomy outlook leads financial institutions to pull back on lending, pushing up short-term interest rates. Funds borrowed from the Fed can then be used to lend more widely to households and businesses.
Borrowing rates in the commercial paper market have been spiking as more companies have sought to raise cash in the expectation that their revenue will plunge. When a company wants a short-term loan, say for three months, it sells the commercial paper, typically to a large bank or money market mutual fund. But many money market funds are seeking to sell commercial paper themselves. They need to raise money because they expect large institutional investors to withdraw funds, and they need cash to cover those withdrawals.
All that activity has made it harder for banks and other companies to raise the cash they need.