Header Ads

Breaking News

Fed Unveils Emergency Lending Program to Shore Up Business Credit Markets

WASHINGTON — The Federal Reserve announced Tuesday that it will try to keep credit flowing to households and businesses by buying up commercial paper, short-term promissory notes companies use to fund themselves.

The program, enacted using the Fed’s emergency lending powers, pulls a page from the central bank’s 2008 financial crisis playbook. Putting it into action required the signoff of Treasury Secretary Steven Mnuchin, whose department will provide $10 billion of credit protection to the Fed using the Treasury’s Exchange Stabilization Fund.

“Commercial paper markets directly finance a wide range of economic activity,” the Fed said in a statement, 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 program will use a special vehicle to buy unsecured and asset-backed commercial paper from eligible companies, according to the release.

It should serve as a backstop for the market that many businesses use to raise cash. Banks and companies have been issuing the liabilities to shore up their coffers: Doing so could help them make it through a dry spell as coronavirus leads to quarantines, shutters shopping centers and closes restaurants. But hardly anybody has been buying the debt.

“The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak,” the Fed said.

The Fed program should act like an escape valve, snapping up commercial paper to keep cash flowing, much as it did during the 2008 financial crisis, when credit markets largely froze. In order to take that step, the Fed 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 after it took a series of sweeping actions on Sunday, including slashing rates nearly to zero and announcing a program to buy up government debt and mortgage-backed securities.

But investors have been clamoring for more, especially as the commercial paper market seized up.

Companies, many of them financial firms, have struggled to raise cash by issuing commercial paper, threatening to set off a chain reaction. Firms have been drawing on lines of credit and pulling money from prime money-market mutual funds to secure cash. Those money funds — low-yield, safe investment vehicles — need to sell their commercial paper to give back cash, but that’s hard to do in a barely functioning market.

As investors and corporations become concerned about the availability of cash, it could trigger even more demand for it. That’s putting pressure on banks to free up their own liquidity to meet demand, which keeps them from serving as an intermediary in other crucial markets. The result is that the gears of the financial system are beginning to get stuck, hampering trading in everything from Treasuries to corporate debt.

“I think we’re either entering a financial crisis or already there,” Jon Hill, a rates strategist at BMO Capital Markets, said on Monday.

Source link

No comments