Fed takes robust action to backstop the economy and financial markets

The Federal Reserve moved aggressively on Monday to mitigate what is going to be a severe disruption in the American economy by committing to an open-ended quantitative easing program and the construction of the Main Street Business Lending Program to support small and medium-sized firms. That disruption will take the form of a depression-like set of shocks that will require a significant intervention by the federal government into economic and social life for the foreseeable future. This morning’s monetary and fiscal interventions are just the latest in a series of actions that are likely to continue throughout this year and likely next in response to the global public health emergency caused by the Covid-19 virus. The Fed threw a lifeline to Main Street by announcing a significant intervention into the real economy and financial markets that intends to limit what will be a gut-wrenching increase in first-time jobless claims, unemployment, income losses and bankruptcies this year. In addition, the policy matrix announced on Monday seeks to facilitate the flow of credit to firms and businesses to ensure that a modicum of commerce continues even as the American public is essentially being told to shelter in place until the virus can be contained. The most important portion of the Fed’s policy action was the creation of the Main Street Business Lending Program, backstopped by Congress, to support eligible small and medium-sized businesses; it complements efforts by the Small Business Administration. While details of the program are not yet available, we would not be surprised if the terms look something like the following:

• Congressional backstop of $85 billion
• Fed liquidity commitment of $915 billion
• Term finance 2.25% over five years with quarterly payments
• Eligibility: firms with $5 billion in revenues or less

Based on Treasury Secretary Steven Mnuchin’s statements on CNBC, small firms with fewer than 500 employees will be able to receive forgivable loans to cover up to two weeks in pay for their workers through the Small Business Administration once Congress and the executive branch agree on a fiscal aid package, which is indeed good news for small firms. On a wider front, the Fed is going to undertake what appears to be an open-ended large scale asset purchase program of Treasuries, commercial mortgage-backed securities and agency mortgage-backed securities. Each of the programs outlined below have specific criteria for eligibility. Please contact your RSM US representative for details. To support the flow of credit, the Fed committed to establishing new lending programs that will be backstopped by $30 billion from the Treasury using the Exchange Stabilization Fund to provide $300 billion in new financial assistance to employers, consumers and firms. The Fed established two new credit facilities to large employers — the Primary Market Corporate Credit Facility to support bond and loan issuance, and a Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds. The Fed will use a special purpose vehicle to make loans from the PMCCF to firms. The Treasury, using the Exchange Stabilization Fund, will make an equity investment of $10 billion in the special purpose vehicle. The Fed established another program — the Term Asset-Backed Securities Lending Facility — to support the flow of credit to consumers and businesses. Its intent is to enable the issuance of asset-backed securities backed by student loans, auto loans and credit card loans guaranteed by the SBA. The Fed also expanded the Money Market Mutual Fund Liquidity Facility to include a wider range of securities, including municipal variable rate demand notes and bank certificates of deposit.