Skip to main content

The U.S. Federal Reserve on Tuesday acted to ensure companies can continue paying workers and buying supplies through the coronavirus epidemic, restarting a program it used to backstop a key financial market during the 2007 to 2009 crisis.

As the Fed and other U.S. officials continued fine-tuning their crisis response and debating further steps to support the economy, the central bank said it would reopen the Commercial Paper Funding Facility to underwrite the short-term loans that companies often use to pay for their operations.

While highly technical, the program was a critical piece of the Fed’s response to the financial crisis a decade ago, at its peak in January, 2009, providing US$350-billion to firms from banks and insurance companies to the financing arms of automakers and other manufacturers.

Stress in the market in recent weeks raised worries that the intensifying efforts made to slow the spread of the virus could leave companies stranded without cash flow or an easy and cheap way to borrow – forcing them toward layoffs or worse.

Debates about other facilities were continuing, and U.S. elected officials were contemplating hundreds of billions of dollars of relief in the form of checks mailed to every household.

Stocks by midday held onto gains of about 3 per cent after a dramatic sell-off over the past week.

Analysts said the Fed’s step was a welcome one, but that both the central bank and elected leaders may need to go further against what one deemed the “social distancing recession.”

Health officials have said that at this point the best way to slow the spread of COVID-19 is for people to stay away from each other, advice that has led to a quarantine in San Francisco, and the ordered closing of restaurants and bars in other cities.

The Fed’s action today “is a smart move. … The advantage now is we can stop conditions from getting worse,” in important funding markets, said Gregory Faranello, head of U.S. rates at Amerivet Securities in New York.

To truly buffer against trouble to come, however, may require more aggressive steps if the estimated 35 million people in the restaurant, entertainment and related industries start to get laid off in large numbers, said David Kelly, chief global strategist at JPMorgan Asset Management.

“The question is are authorities doing all that they can to soften the blow of the social distancing recession?” Kelly said. “I don’t think we’re there yet. … There’s going to be a lot of human misery out there.”


The Fed at least felt its moves today could keep corporate cash flow troubles from deepening into problems of solvency.

“An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak,” the Fed said in a statement issued Tuesday morning.

Even as the program was rolled out, policy makers flagged they were ready to do even more to put the power of the Fed’s purse to work to blunt what many economists argue is now a recession in all but name.

U.S. retail sales posted their biggest decline in more than a year in February, and the coronavirus pandemic is expected to depress sales in the months ahead.

But official data are unable to capture in real-time the economic effects of changes in behaviour taking place across the country as families isolate themselves in homes and businesses close either out of caution or by edict.

Cleveland Fed president Loretta Mester in a Tuesday statement said if markets continue to show stress she would support restarting other programs from the 2007 to 2009 era such as the Term Auction Facility to provide more flexible lending to banks.

“Lack of liquidity in financial markets is a first-order problem that can reverberate through the financial system and the economy,” she said.

The U.S. central bank has been forced to take several emergency actions over the past two weeks to keep the economy afloat.

U.S. President Donald Trump on Monday discouraged gatherings of more than 10 people, a step that while short of a formal quarantine shows the severity of the situation even though officially only about 4,000 in the Unites States had been infected as of Tuesday.

The Fed on Sunday slashed interest rates to near zero and pledged hundreds of billions of dollars in asset purchases.

It is continuing to fine-tune its response, proposing also to ease some regulatory rules for now to encourage banks to use more of their available capital for lending.