Fed Under Gun to Go Well Beyond Crisis Play Book to Combat Virus

The U.S. Federal Reserve is facing increasing pressure to go well beyond its crisis-era play book and dramatically boost its support for the nose-diving economy via new lending programs for businesses and state and local governments.

Proponents of the more aggressive measures argue that the Fed needs to open up the spigots to help offset a coronavirus-driven cash crunch that threatens to force firms to shut down and push state and local finances to the breaking point.

House Speaker Nancy Pelosi said she urged central bank chairman Jerome Powell in a phonecall on Tuesday to “explore ways to use the Fed’s authority to assist state and local governments.”

That request came on the heels of an appeal on Monday by the powerful U.S. Chamber of Commerce that the Fed work with the Treasury Department to come up with new lending facilities for businesses.

The Fed is being called on to do more even after it cut interest rates effectively to zero, restarted quantitative easing and resurrected an emergency financing facility used during the financial crisis to help U.S. companies borrow using commercial paper.

While the Chamber of Commerce welcomed the commercial paper program, the business lobbying group is also pushing for broader Fed action to promote bank lending to businesses.

“What we’re focused on,” U.S. Chamber of Commerce Executive Vice President Neil Bradley told reporters “is how do we make sure this doesn’t become an insolvency event for individuals, families and businesses.”

To help get the credit facilities off the ground, the Chamber wants Congress to ease restrictions placed on the Fed’s emergency lending powers after the financial crisis.

Virginia Senator Mark Warner also would like to see more Fed support for businesses.

The veteran Democratic Party lawmaker rolled out a detailed proposal on Tuesday for a temporary corporate and small business facility that would pump $1 trillion into the economy via bank loans and be backed by $100 billion from the Treasury Department.

“If we do not take action immediately, thousands of American businesses and millions of their employees are at enormous risk,” Warnersaid.

Warner said, in an interview, that his staff had discussed the proposal with the Fed. “I don’t want to characterize their response” except to say that it wasn’t negative, he said.

The Fed declined to comment.

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Federal Reserve Bank of Atlanta President Raphael Bostic said on Tuesday that he was particularly concerned about the thousands of small businesses, including restaurants, that could struggle to survive because of closures prompted by the virus. He pointed out that during the Great Recession, the Fed used its operating discretion to take bold actions.

“We all need to be thinking about as a Fed and also as a government is how to do we creatively provide support to those institutions most exposed,” hesaid in a joint interview with Bloomberg and Reuters.

The head of the House of Representatives Financial Services Committee that oversees the central bank agrees.

The Fed should get creative in its response to the economic threat posed by the coronavirus outbreak and consider extending financial support to state and local governments, Democratic lawmaker Maxine Waters of Californiasaid on Monday.

In an opinion article in the Wall Street Journal on Monday, former Fed Governor Kevin Warsh said the Fed’s weapons from the financial crisis must be paired with new ones to fight the pandemic.

He called for a government-backed credit facility “to ensure that sound businesses and households have ready access to cash to get through the crisis.” The Fed program would be supported by money from the Treasury Department’s Exchange Stabilization Fund and a fiscal backstop authorized by Congress.

The Treasury is kicking in $10 billion of credit protection from the stabilization fund as part of the Fed’s commercial paper financing facility.

The credit protection “points toward other ways the Fed can get creative in supporting the economy during this national emergency,” including helping small businesses, JPMorgan Chase & Co. chief U.S. economist Michael Feroli wrote in a note to clients on Tuesday.

— With assistance by Kevin Cirilli, Steve Matthews, and Matthew Boesler

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