WASHINGTON: The US Federal Reserve on Thursday rolled out a broad, US$2.3 tril (RM9.98 tril) effort to bolster local governments and small and mid-sized businesses in its latest move to keep the US economy intact as the country battles the coronavirus pandemic.
The US central bank said it would work through banks to offer four-year loans to companies of up to 10,000 employees and directly buy the bonds of states and more populous counties and cities to help them respond to the health crisis.
In announcing what may prove to be the Fed’s most groundbreaking step in the current crisis, Fed Chair Jerome Powell said the central bank’s role had now broadened beyond its usual focus on keeping markets “liquid” and functional, to helping the United States get the economic and financial space it needs to fix a dire health emergency.
“Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus,” Powell said in a statement released on Thursday.
“The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”
US stock index futures erased earlier losses and were trading higher after the Fed’s announcement.
The programme offers to pump up to US$500 bil into local governments, which are both on the front lines of the health battle yet also may see tax revenues collapse as unemployment rises and businesses are shut under social distancing rules aimed at curbing the spread of the virus.
The Fed in this case is buying the bonds directly – a step called for by some Democrats in the US House of Representatives as a needed prop for local governments. The Fed’s assistance will be available to the states, the District of Columbia, counties with more than 2 million residents, and cities of more than 1 million.
The new “Main Street” facility will use banks to funnel up to US$600 bil in loans of at least US$1 mil to firms that have up to 10,000 employees or less than US$2.5 bil in revenue, an effort to expand the safety net for businesses begun under the CARES Act recently passed by Congress.
That rescue bill authorises direct loans by the US Treasury to some larger firms, and US$350 bil for businesses with under 500 workers.
Payments on the new Main Street loans will be deferred for a year; banks will be required to keep at least a 5% stake in each loan.
Firms receiving the loans “must commit to make reasonable efforts to maintain payroll and retain workers,” and cannot use them to refinance existing debt, and must follow the limits on things like dividend payments and compensation set out for larger firms.
The central bank may not be done. The programmes announced on Thursday rely on US$195 bil in capital provided by the US Treasury. That is only a portion of the US$454 bil that the Treasury was provided under the CARES Act for new Fed programmes.
The Fed said in its announcement that it would particularly watch the financial performance of local governments to see if more help is needed. – April 9, 2020, Reuters
