Fed mounts aggressive new steps to combat coronavirus hit to economy

The US Federal Reserve on Monday said it would begin backstopping an unprecedented range of credit for households, small businesses and major employers in an effort to offset the “severe disruptions” to the economy caused by the coronarvirus outbreak.

The steps include establishment of new programs that will lend against student loans, credit card loans, and US government backed-loans to small businesses, as well as new programs to buy bonds of larger employers and make loans to them. 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.

Existing purchases of US Treasury and mortgage-backed securities will be expanded as much as needed “to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”

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 financial 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.

In a statement the Fed said the effort, approved unanimously by members of the Federal Open Market Committee, was taken because “it has become clear that our economy will face severe disruptions” as a result of the health crisis.

The central bank’s go-for-broke approach is an acknowledgment that its previous plans to keep credit flowing smoothly, which included dollar limits, wouldn’t be enough in the face of the viral outbreak, which has brought the US 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.

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.

More on this subject: Coronavirus

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