The Fed Goes All In With Unlimited Bond-Buying Plan
The Federal Reserve will buy bonds as needed to calm markets, and will buy corporate debt in a series of emergency lending programs.
By Jeanna Smialek
- March 23, 2020Updated 12:45 p.m. ET
The Federal Reserve, determined to try to keep the spread of coronavirus from devastating the American economy, rolled out a series of sweeping new programs on Monday meant to shore up large and small businesses and keep markets functioning.
As mortgage markets showed signs of crumbling, companies struggled to sell debt and stresses plagued the entire financial system, the Fed announced several never-before-attempted actions to try to calm the turmoil.
The Fed pledged to buy as much government-backed debt as needed to restore normal functioning in the markets for housing and Treasury bonds. It announced that it would buy longer-dated corporate debt, including the riskiest investment-grade bonds, for the first time in its history. And it promised to unveil more — including supports for small businesses — in the days and weeks to come.
Those efforts could be scaled up dramatically if Congress gives the Treasury Department additional funding to back the Fed's programs, which Republican lawmakers have proposed but Democrats are resisting.
"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 central bank said in a Monday morning statement, adding that "the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses."
The central bank, which restarted its massive bond-buying program eight days ago, said it would expand well beyond the "at least" $700 billion in Treasury and $200 billion in mortgage-backed securities it initially committed to buying. Instead, officials will buy bonds "in the amounts needed to support smooth market functioning" — including buying government-backed debt tied to commercial real estate.
The program, which the policy-setting Federal Open Market Committee supported unanimously, is a nod to the fact that crucial markets at the center of the financial system have struggled to function in spite of the Fed's efforts to date. In laying out such an explicitly unlimited package, and in creating such expansive emergency lending programs, the Fed is going far beyond its playbook from the 2008 financial crisis.
The scope of the package — which Fed officials, staff and lawyers hammered out over weeks of back-to-back late nights — is a clear indication that the Fed is throwing its full weight at confronting the economic fallout from the coronavirus, which poses a severe threat as factories shut down, people lose jobs and the economy grinds to a halt.
It comes as lawmakers in Congress continue to struggle to find a fiscal response, making the central bank the primary line of defense, at least for now.
"The speed of the response has been unprecedentedly fast," said Roberto Perli, a partner at Cornerstone Macro and former Fed economist. "It is a 'whatever it takes' moment, but backed by actions, not just by words."
The economic situation has been particularly painful for both large and small businesses, as shops, airplanes and hotels have abruptly emptied out. Many will need financial support to survive, whether in the form of loans or new debt issuance. As buyers have become unwilling to snap up outstanding corporate debt, it has pushed up interest rates, making it too expensive for companies to raise money by selling new bonds.
The Fed's plan to bolster the corporate bond market, which has been under pressure as companies find themselves on shaky ground, will work through two new programs established using the Fed's emergency lending powers. They should help market functioning while allowing companies to stay afloat.
One of them, the Primary Market Corporate Credit Facility, is open to investment-grade companies and will provide bridge financing of four years, according to the Fed's release. The Fed will create a special purpose vehicle that will both purchase bonds from eligible issuers and extend loans.
The program defers interest payments on that bridge financing "for six months, extendable at the discretion of the Board of Governors" to get companies through the worst of the coronavirus period. But the support comes with restrictions — companies taking that option are not allowed to buy back shares or pay out dividends, both of which eat into a firm's cash position.
The other program, the Secondary Market Corporate Support Facility, will purchase already-issued debt, which has become hard to trade, including by buying exchange-traded funds that bundle bonds together. The Fed said that together the programs were intended "to support credit to large employers."
Fed officials are also taking measures to support smaller businesses, resurrecting a program from the 2008 financial crisis, the Term Asset-Backed Securities Loan Facility or TALF, that encouraged lending to small businesses and households. Officials also announced that they would set up a new program, the Main Street Business Lending Program, that would "support lending to eligible small-and-medium sized businesses," though they gave few details as to how.
The three fleshed-out programs will provide "up to $300 billion in new financing," the central bank said.
Congress could give Fed officials the ability to extend the breadth of those programs. Republican Senators have suggested creating a fund of $425 billion at the Treasury Department that the Fed could use to back emergency lending facilities — enabling them to go far beyond their current scale.
Because the Fed cannot take on substantial credit risk itself, the programs it is unveiling now are backed by a Treasury Department fund, which contains just $95 billion. Treasury Secretary Steven Mnuchin on Sunday suggested that the new money could be leveraged by the Fed to back some $4 trillion in financing.
"I think they decided to do it today because liquidity in many corners of markets is bad," Mr. Perli said of the Fed's Monday announcement. "Today is the first step, but it will be a much bigger step once Congress passes this legislation."
Yet that extra support has become a political flash-point, and one of the sticking points holding up a broader congressional relief package. Democrats are worried that the Fed's loans would too carry few restrictions. While the Fed is limiting companies that receive its loans and take an interest deferral from stock buybacks, it declined to say whether it has the legal authority to go further than that, for instance by preventing beneficiaries from laying off workers.
Congressional leaders and the Trump administration remained locked in negotiations on Monday morning, in hopes of finding agreement. The total fiscal response could approach $2 trillion, including assistance for workers, corporations and small businesses, and direct payments to low- and middle-income families.
Democrats on Sunday evening prevented Republicans from proceeding to a vote on the fiscal bill before negotiations were complete, and the Senate was set to begin another series of procedural votes around noon on Monday.
The Fed's announcements came as markets braced for a tumultuous day amid Congress's ongoing debate.
Traders, while welcoming the Fed's expanded plans to buy assets, remained cautious about the central bank's ability to shift the trajectory of an economy that appears to be in free-fall because of the coronavirus.
"It is hard for the Fed to stimulate underlying demand. For that, fiscal stimulus is needed," Randy Watts, chief investment strategist at William O'Neil, an equity research and advisory firm, wrote in an email. "The deal in the Senate of the fiscal stimulus bill is obviously disappointing."
The S&P 500 still slumped more than 2 percent shortly after opening, as its brief climb on Monday was washed out by a wave of selling.
The Fed has been acting almost daily to shore up the economy and keep markets functioning as coronavirus spreads, shutting down huge swathes of the United States and global economy and threatening to plunge the world into a deep and painful recession.
The central bank slashed interest rates to near-zero just over a week ago. In the days since, it ramped up the size of its liquidity injections — meant to keep the market for short-term loans between banks functioning normally — and sped up the pace of its Treasury and mortgage-backed security purchases.
The Fed had also announced several other emergency lending programs, which allow it to backstop markets during especially unusual and demanding circumstances. It is buying commercial paper, a type of short-term debt companies use to fund themselves, to keep that market functioning smoothly. It has backstopped money market mutual funds, which both businesses and companies use to stash cash, including ones that invest in municipal debt.
It expanded those efforts on Monday, saying it would accept a wider range of securities — including municipal variable rate demand notes and certificates of deposit — as collateral in its mutual fund backstop. And it said it would include high-quality, tax-exempt commercial paper in that program.
The Fed's overarching goal is to keep the economic shock caused by coronavirus, which is sure to be steep but which could prove short, from turning into a full-blown financial crisis that interrupts the flow of credit to businesses and households that need it.
Making sure that markets remain functional is crucial, because the economic hit from coronavirus is going to be substantial even without the accelerant of a financial meltdown. The virus has closed schools, emptied factories, and led to mass layoffs — the United States economy has ground to an abrupt standstill.
Economists at Goldman Sachs estimate that growth could contract by 24 percent in the second quarter while Morgan Stanley is projecting a 30 percent hit — which would be the worst single-quarter drop recorded in modern American economic statistics.
"Economic activity has come to a near standstill in March," Morgan Stanley wrote in a research note on Monday.
Jeanna Smialek writes about the Federal Reserve and the economy for The New York Times. She previously covered economics at Bloomberg News, where she also wrote feature stories for Businessweek magazine. @jeannasmialek
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