US Fed moves beyond markets with US$2.3t package to aid SMEs

Washington

THE US Federal Reserve on Thursday rolled out a broad, US$2.3 trillion effort to bolster local governments and small and mid-sized businesses in its latest move to keep the US economy intact as the country battles the coronavirus pandemic.

The Fed said that it would work through banks to offer four-year loans to companies of up to 10,000 employees, and begin to directly lend to state governments and more populous counties and cities to help them respond to the crisis.

In announcing what may prove to be the Fed's most groundbreaking steps yet in the battle against the coronavirus, Fed chair Jerome Powell said the central bank's role had now broadened beyond its usual focus on keeping markets "liquid" and functional, to helping the United States get the economic and financial space it needs to fix a dire health emergency.

"Our country's highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus," Mr Powell said in a statement released on Thursday. "The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible."

Though many of the programmes are due to remain open only until September, Mr Powell said the Fed's commitment would only be limited by the need to get the pandemic controlled and try to build a robust recovery.

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"We are deploying these lending powers to an unprecedented extent . . . 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 in Webcast remarks from the Brookings Institution.

Along with rolling out programmes for smaller and mid-sized firms that are at the core of the US economy, as well as local governments, the Fed also broadened the universe of larger corporations it can help to account for the fact that the credit worthiness of some may decay because of the current crisis.

The programme offers to pump up to US$500 billion into local governments, which are both on the front lines of the health battle yet also may see tax revenues collapse as unemployment rises and businesses are shut under social distancing rules aimed at curbing the spread of the virus.

The Fed in this case is directly buying municipal bonds of up to two year's duration - a step called for by some Democrats in the US House of Representatives as a needed prop for local governments. The new "Main Street" facility will use banks to funnel up to US$600 billion in loans of at least US$1 million to firms that have up to 10,000 employees or less than US$2.5 billion in revenue, an effort to expand the safety net for businesses begun under the Cares act recently passed by Congress.

"The Fed made history today" by throwing its vault open to small and medium-sized businesses that are at the core of the US economy, said Joe Brusuelas, an economist who focuses on mid-sized companies with consulting firm RSM. "This a robust first step towards providing a lending facility that will stem what was a likely solvency crisis inside the critical small and medium-size commercial community."

He said he expected demand for loans under the new Fed facility to be high, and that it might be expanded to as much as US$1 trillion as further rescue steps are taken in Congress.

That rescue bill authorises direct loans by the US Treasury to some larger firms, and US$350 billion for businesses with under 500 workers. Payments on the new Main Street loans will be deferred for a year; banks will be required to keep at least a 5 per cent stake in each loan.

Firms receiving the loans "must commit to make reasonable efforts to maintain payroll and retain workers", and cannot use them to refinance existing debt, and must follow the limits on things such as dividend payments and compensation set out for larger firms.

The central bank may not be done. The programmes announced on Thursday rely on US$195 billion in capital provided by the US Treasury. That is only a portion of the US$454 billion that Treasury was provided with under the Cares act for new Fed programmes.

The Fed said in its announcement that it would particularly watch the financial performance of local governments to see if more help is needed. REUTERS

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