Federal Reserve Policies in Response to COVID-19 

March, 2020 - Hunter Thornton

The Board of Governors of the Federal Reserve System (the “Fed”) has implemented monetary policy and federal programs in response to COVID-19. The policies and programs primarily affect financial institutions in the business of lending, but an understanding of the policies will aid all borrowers in knowing the constraints of their lenders and the process by which they will receive funds.

All of the policies and programs listed below are intended to facilitate lending and liquidity in the financial markets and greater economy by providing vehicles pursuant to the Fed’s powers under Federal Reserve 13(3) under which the government can allocate funds pursuant to the CARES Act.

Federal Reserve 13(3) is a tool that can be used in times of crisis to help mitigate pressure in financial markets that would otherwise have severe adverse consequences for households, businesses, and the U.S. economy. In lieu of allowing the government to lend directly to corporations, the Secretary of the Treasury can authorize the Fed to implement temporary emergency programs during financial crises.

Below is a brief summary of the Fed’s actions in response to the COVID-19 outbreak.

Please note that the Main Street Business Lending Program, which will likely have the greatest effect on small businesses, has not yet been promulgated, but news reports indicate that “it is likely to involve the Fed buying small business loans made by banks.”

Primary Market Corporate Credit FacilityandSecondary Market Corporate Credit Facility

  • The Fed can now be a direct purchaser of corporate debt, either in primary issuance or debt that is trading in secondary market.
  • Only available to companies with investment grade credit.
  • The SMCCF is essentially the same as the PMCCF, but allows the Fed to purchase corporate debt in the secondary market and doesn’t authorize direct loans to issuers.
  • Eligible issuers are U.S. companies headquartered in the United States and with material operations in the United States. The scope of eligible issuers may be expanded in the future. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation.

 

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