Fed to provide extra $2.3tn in loans as US unemployment tops 16.6m

Federal Reserve chairman Jay Powell said the Fed would use its powers “forcefully, proactively and aggressively” until the economy recovers from the coronavirus shock, as the US central bank moved to offer an extra $2.3 trillion (€2.1 trillion) in credit and support the market for high-yield corporate debt.

Mr Powell’s comments came as the economic damage inflicted by the coronavirus pandemic was highlighted by data showing that 6.6 million people filed for jobless benefits in the US in the past week, bringing the total of America’s newly unemployed to 17 million since the cascade of business shutdowns caused by the virus.

In remarks by webcast to the Brookings Institution on Thursday, Mr Powell said the emergency measures being rolled out in recent weeks were necessary given the “very unusual circumstances” of severe economic and financial dislocations, but would be rolled back once the crisis eased.

“We are deploying these once lending powers to an unprecedented extent, enabled in large part by the financial backing of Congress and the treasury. We will continue to use these powers forcefully, proactively and aggressively until we are confident that we are solidly on the road to recovery,” Mr Powell said.

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The Fed chairman added that the “emergency tools” would be “put away” once recovery set in and “private markets and institutions are once again able to perform their vital functions of channelling credit and supporting economic growth”.

The Fed has already slashed interest rates close to zero and expanded its balance sheet in a big way by buying up treasury debt and government-guaranteed mortgage-backed securities.

New loan facilities

On Thursday, it further ramped up its emergency action by detailing new loan facilities worth $2.3 trillion to deliver credit to small businesses and municipalities. It also expanded measures introduced last month to back corporate debt markets.

Among the new steps, the Fed said it would be setting up a tool to support a $350 billion lending fund that is part of a $2 trillion fiscal stimulus package passed by Congress last month.

The move should help banks more rapidly move the loans off their balance sheets, improving participation in the plan. The Fed said it would “extend credit to eligible financial institutions that originate [small business] loans, taking the loans as collateral at face value”.

The Fed also said it would purchase up to $500 billion of short-term notes directly from US states, including Washington DC, counties with a population of at least two million people and cities with at least a million residents.

The central bank move was just the latest illustration that the Fed was willing to do whatever it takes to support financial markets. Randy Frederick, vice-president of trading and derivatives at Charles Schwab, said. “We’ve heard from the Fed that they have their chequebook out, and it’s a blank cheque.”

In addition to setting up new lending tools, the Fed said it would also increase the size and scope of facilities aimed at helping corporate credit markets. It had initially announced its historic step to shore up those markets last month – a move it had not done during the 2008 financial crisis. The Fed will now buy riskier debt, adding junk bond exchange traded funds to the list of assets it will buy.– Copyright The Financial Times Limited 2020