Friday, April 10, 2020

With $2.3 trillion injection, Fed’s plan far exceeds its 2008 rescue

The Federal Reserve said it would buy some municipal bonds and some riskier debt to help governments and companies.

Representative image

The Federal Reserve said it could pump $2.3 trillion into the economy through new and expanded programmes it announced on April 9, ramping up its efforts to help companies and state and local governments suffering financial damage from the coronavirus.
The central bank rolled out its relief package just as the government announced that 6.6 million more Americans were newly jobless, laying bare the severe damage to the economy as quarantines keep workers at home and grind entire sectors to a standstill. About 16 million people have filed for unemployment in the past three weeks.
The Fed announced that it would use Treasury Department funds recently authorised by Congress to buy municipal bonds and expand corporate bond-buying programmes to include some riskier debt. The Fed also rolled out a highly anticipated lending programme that targets midsize companies, including those not eligible under a Small Business Administration loan programme.
The measures push the Fed far beyond anything it attempted in the 2008 financial crisis, and expand its already significant efforts to cushion the economy and calm markets, which have included money market interventions and an unlimited bond-buying campaign. The Fed had previously rolled out about $500 billion worth of emergency lending programmes, so this could more than quadruple the size of its push.
“We are deploying these lending powers to an unprecedented extent, enabled in large part by the financial backing from Congress and the Treasury,” Jerome H Powell, the Fed chairman, said in a speech after the announcement on April 9. He pledged to continue using those powers “forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”
The Fed and Congress have been racing to support the US economy as coronavirus shutters businesses, tanks consumer confidence and leaves millions of workers without a paycheck.
While some of their newly-announced programmes urge or incentivise companies to hang onto employees, they are just getting up and running, coming too late for many. The most recent economic rescue bill signed into law by President Donald Trump included a new cushion for laid-off workers, in the form of more generous unemployment benefits.
The Fed’s goal is to make sure the ongoing hit to the labour market and the broader economy does not prove long-lived. The emergency programmes are intended to get credit flowing to companies and governments that might struggle to access funding as uncertainty roils markets, helping them to make it through. Congress gave the Treasury Department $454 billion to back up the Fed’s efforts, which need to be insured against losses, giving officials room to scale them up dramatically.
The Fed’s April 9 moves use that funding to push the central bank’s emergency lending powers into uncharted territory. Officials had avoided buying municipal debt and lower-rated company debt, out of concern about credit risk and to avoid picking winners and losers. But amid market disruptions, calls for Fed action in both areas have been building.

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