Published: March 18, 2020

The Marriner S. Eccles Federal Reserve Board Building in Washington, D.C. (iStock)

Just two days after slashing its benchmark interest rate to zero and announcing plans to buy $700 billion in Treasury- and mortgage-backed securities, the Federal Reserve said it will bring back two of its Great Recession-era credit programs as global financial markets continue to reel from the effects of the coronavirus.

In consultation with the Treasury, the Fed cited the “unusual and exigent circumstances” in invoking emergency powers that allow it to lend to more firms than just financial institutions.

After the second emergency rate cut announced last weekend failed to stem market losses, it quickly became apparent that lower interest rates alone will not be enough to boost demand and keep the economy out of a recession. Now the Fed is moving to provide additional liquidity to the banking system and also to companies that are facing a cash crunch due to a pandemic-related drop-off in revenues.

The intended effect of these liquidity and regulatory measures is to give a lifeline to cash-strapped companies so they don’t lay off workers. Keeping the unemployment rate from rising is also key for ensuring that demand for all types of commercial real estate holds up in the face of what officials hope will be a short-lived recession followed by a rebound in economic growth later this year.

In the latest move, the central bank established a Commercial Paper Funding Facility that would extend short-term loans to corporations with strong credit ratings. Those loans tend to be used by companies to finance day-to-day business operations.

The Fed also said it will create a Primary Dealer Credit Facility, which will allow the central bank to provide loans of up to 90 days to 24 large financial institutions against a broader range of collateral.

As the outbreak rattled financial markets over the past couple of weeks, the Fed has acted to employ a wide arsenal of tools to combat stresses in the financial system and taken steps to ensure credit is available to businesses and households affected by the coronavirus outbreak.

Galina Alexeenko is a managing director and senior economist for CoStar Market Analytics in Atlanta.

Author Credit: Galina Alexeenko, Costar

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