The Fed Goes All In With Unlimited Bond-Buying Plan Due to Coronavirus

The Federal Reserve, determined to try to keep the spread of the 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 bolster the markets for housing and Treasury bonds. It announced that it would buy corporate bonds, including the riskiest investment-grade debt, 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.

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 while lawmakers in Congress continue to struggle to find a fiscal response, making the central bank the primary line of defense.

“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.”

To try to curb the virus, several more states, including Massachusetts, Michigan and Oregon, moved on Monday to impose stay-at-home orders. Such orders will soon cover more than 100 million Americans.

In New York, which accounts for about 6 percent of the virus cases worldwide and is facing critical medical shortages, Gov. Andrew M. Cuomo ordered hospitals to increase capacity by at least 50 percent. Almost 21,000 cases have been recorded in the state, with at least 157 deaths. But President Trump suggested he would soon re-evaluate the federal guidance urging social distancing. Also on Monday he signed an executive order to keep people and businesses from hoarding supplies and from engaging in price gouging.

In Britain, the government imposed a virtual lockdown, closing all nonessential shops, banning meetings of more than two people and requiring people to stay home, except for trips for food or medicine.

The Fed’s moves, decided over weeks of back-to-back late nights, are meant to be only a first step. They could be scaled up sharply 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, an uncharacteristically blunt warning from a usually staid institution.

The central bank, which restarted its giant 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 laying out such an explicitly unlimited package, and in creating such expansive emergency lending programs, the central bank is going far beyond its playbook from the 2008 financial crisis.

As the virus has emptied out shops, airplanes and hotels, both large and small businesses have felt the economic pain. Many will need financial support to survive, whether in the form of loans or new debt issuance. With companies on shaky ground and cash-hungry investors unwilling to snap up outstanding corporate debt, interest rates have jumped, making it too expensive for companies to raise money by selling new bonds.

The Fed’s plan to bolster the corporate bond market 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 buy bonds 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 would purchase already-issued debt, and the Fed said together the programs would “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.

Republican senators have suggested creating a fund of $425 billion at the Treasury Department that the Fed could use to back emergency lending facilities — which would enable such programs to grow far beyond that scale.

Because the Fed cannot take on substantial credit risk itself, the Treasury Department backs its emergency lending, using money from a fund that contains just $95 billion. Treasury Secretary Steven Mnuchin on Sunday suggested that the new money in the Republican bill could be leveraged by the Fed to back some $4 trillion in financing.

“We do have limited amounts of money we’re using before Congress passes this bill, so we’re not waiting on Congress,” Mr. Mnuchin said in an interview on CNBC on Monday. “As Congress gives us the authority, we’ll be increasing the facilities substantially.”

Yet the 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 carry too few restrictions. Beyond limiting companies that receive its loans and take an interest deferral from stock buybacks, the Fed declined to say whether it has the legal authority to go further than that, for instance by preventing beneficiaries from laying off workers.

Democrats on Sunday evening prevented Republicans from proceeding to a vote on the fiscal bill before negotiations were complete, blocking it again on Monday.

In their own bill in the House, Democrats instructed the Fed to establish a small business lending facility. The bill would mandate the creation of a Fed facility that would indirectly help people who miss mortgage payments because of the coronavirus, and another that would buy and sell municipal debt used to fund public health responses.

Congressional leaders and the Trump administration remained locked in negotiations by Monday evening. 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.

The Fed’s announcements came early on Monday as markets braced for a tumultuous day.

Traders remained cautious about the central bank’s ability to shift the economy’s trajectory, and stocks sank throughout the day, with the S&P 500 index closing down nearly 3 percent.

“The problem is people are still waiting for the fiscal plan, and the spread of the virus is getting worse,” said Priya Misra, head of global rates strategy at TD Securities. She pointed out that in the markets the Fed was trying to soothe — especially that for mortgage debt — conditions did improve.

“The Fed facilities worked through the market today,” she said. “The problem is that we’re headed into a recession — and a pretty deep one.”

The Fed has been acting almost daily as the coronavirus spreads, shutting down huge swaths of the United States and global economy and threatening to plunge the world into a major downturn.

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 announced several other emergency lending programs.

It is buying commercial paper, a type of short-term debt companies use to fund themselves, and it has backstopped money market mutual funds, which both businesses and companies use to stash cash, including ones that invest in municipal debt.

The Fed’s overarching goal is to keep the economic shock, 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.

The hit to growth promises to be substantial even without the accelerant of a financial meltdown.

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. The question is how long the virus will last — and how quickly things will bounce back after.

“They hit the main markets to keep credit flowing,” Donald L. Kohn, who was vice chair at the Fed during the 2008 financial crisis, said of Monday’s Fed actions.

The crucial point, he said, is “preventing permanent damage.”

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