The Federal Reserve on Monday put forward another in a series of lending facilities intended to fortify the economy as it absorbs three large shocks that are cascading across the U.S. economic landscape.
In our estimation, this move represents a de facto rescue of the Paycheck Protection Program, the Trump administration’s signature $350 billion program that has experienced at best a tenuous and difficult launch over the past few days.
The Fed stepped in to reverse the growing risk aversion inside the domestic system of finance toward the making of loans to firms with 500 or fewer employees.
This should help on the margin encourage potential lenders to provide bridge financing for small firms that otherwise would most likely not survive the first phase of the crisis.
Terms of financing will be announced in the coming days. The original program, approved two weeks ago under the CARES Act, was structured around a fixed interest rate of 0.5% and intended to defer interest payments for up to six months.
The U.S. Treasury and the Small Business Administration later increased the rate to 1% — an illustration of lenders’ reluctance to participate in the program. Last week, the Independent Community of Bankers of America wrote a letter to the administration asking that policymakers peg the rate closer to 4%.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.