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Federal Reserve announces $2.3 trillion in funding for households, local governments

Brian Cheung
Reporter

The Federal Reserve unveiled plans to provide up to $2.3 trillion in loans to support local businesses and governments, as the U.S. economy continues to work through the disruptions from the novel coronavirus. The central bank also released more details on its anticipated Main Street Lending Program, which it says will support up to $600 billion in loans tied to small- and mid-sized businesses.

As businesses continue to reel from the coronavirus-induced closures across the country, the Fed’s efforts are aimed at maintaining the flow of credit to Main Street and to the local municipalities facing dramatic funding gaps with an effective freeze on tax revenue.

The Fed also said it would absorb some below investment-grade debt through its previously-announced credit facilities.

Similar to previously announced liquidity efforts, the Fed and the U.S. Treasury will use “special purpose vehicles” to hold business loans and municipal debt. The facilities would be backed by $195 billion in credit protection and equity from the Treasury, mostly funded by appropriations from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act appropriated a total of $454 billion for Fed and Treasury programs.

The Main Street Lending Program will be able to scale up $75 billion in support from the Treasury into $600 billion in 4-year loans to companies hiring up to 10,000 workers or with revenues of less than $2.5 billion.

The loans, to be disbursed through eligible banks, would allow for interest deferred payments for a year and would be at least $1 million in size. Under the program, banks will retain a 5% share of the loan and sell the remaining 95% to a facility to be set up by the Fed.

The Main Street Lending Program was announced by the Fed on March 23 and is aimed at providing supplemental support to medium-sized businesses that are too large to qualify for the Small Business Administration’s Paycheck Protection Program.

The Fed and the Treasury say the Main Street Lending Program is still being finalized and will solicit feedback from the public on possible changes through April 16.

Federal Reserve Chair Jerome Powell speaks during a news conference, Tuesday, March 3, 2020, to discuss an announcement from the Federal Open Market Committee, in Washington. In a surprise move, the Federal Reserve cut its benchmark interest rate by a sizable half-percentage point in an effort to support the economy in the face of the spreading coronavirus. Chairman Jerome Powell noted that the coronavirus "poses evolving risks to economic activity." (AP Photo/Jacquelyn Martin)

In addition to the Main Street Lending Program, the Fed has also said it would backstop loans generated under the PPP. The Fed announced its intention to roll out such a facility three days ago but clarified Thursday that it would take the loans as collateral at face value.

Fed officials say businesses will be able to access a loan from both the PPP and the Main Street Lending Facility. Those borrowing from the Main Street Lending Facility will face restrictions on how they use the money, such as proving that it will “make reasonable efforts” to maintain payroll levels and retain employees.

Municipal and corporate debt

Speaking earlier in the morning, Fed Chairman Jerome Powell said the central bank is committed to acting “forcefully, proactively, and aggressively” until the economy is headed for recovery. Powell added that the measures announced today are emergency tools designed to address “very unusual circumstances.”

“In the meantime, we are using our tools to help build a bridge from the solid economic foundation on which we entered this crisis to a position of regained economic strength on the other side,” Powell said.

Notably, the Fed also announced that it will step in to help local and state governments across the country grappling with funding pressures.

The Fed says it will support the purchase of up to $500 billion in short-term notes directly from states and larger counties and cities. The Municipal Liquidity Facility will be supported by $35 billion of credit protection from the Treasury.

The Fed will also expand its liquidity efforts on corporate credit by increasing the size and scope of its Primary and Secondary Market Corporate Credit Facilities and its Term Asset-Backed Securities Loan Facility (TALF). The facilities will now support up to $850 billion in credit backed by $85 billion in credit protection from the Treasury.

The Primary Market Corporate Credit Facility will now absorb debt from “fallen angel” companies with below investment grade credit (BB-/Ba3). The Secondary Market Corporate Credit Facility will now also take on some exposure to U.S. high-yield corporate bonds.

The TALF program was also expanded to take on collateral in the form of well-rated commercial mortgage-backed securities, leveraged loans, and newly-issued collateralized loan obligations.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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