WASHINGTON: In undertaking what will undoubtedly be its largest rescue effort ever, the Federal Reserve on Monday announced programs that represent a never-before-seen intervention by the central bank into the heart of the"real" American economy.
"This is the Fed taking a really huge step to try to backstop the financing of real activity," said Bill English, a Yale School of Management professor and former head of the Fed's monetary affairs division. The programs"can be ramped up. They can take on more risk. It is a suite of programs that is pretty complete."
But the Fed helped bail out banks, plugged holes deep in the financial system, bought trillions of dollars in bonds and engineered a low-interest rate landscape that helped foster an arduous recovery from the 2007-2009 financial crisis and recession. Though still cast in the usual Fed language of ensuring"liquidity" and keeping financial markets moving, the implications are more profound - of central bank loans scaled to such a point that they undergird payrolls, rents, and firm survival as the coronavirus economic shock rolls through.
It has found workarounds for restrictions on buying corporate debt directly by establishing a"special purpose vehicle" that will make those purchases - with money borrowed from the Fed and with Treasury providing capital to be used in case there are losses.The corporate bond purchases will be confined to companies with an"investment grade" credit rating, a standard some firms may fail to meet in coming weeks as business erodes.