Federal Reserve Unveils Emergency Lending Program During Coronavirus Pandemic

The Fed’s move comes on the heels of the sweeping actions its took on Sunday, when it slashed rates nearly to zero and announced a program to buy up government debt and mortgage-backed securities. Those purchases are also meant to ease strained markets, including that for Treasury securities — which had become hard to trade, a problem because they are in many ways the backbone of the financial system.

The Fed has also sweetened the terms of its so-called discount window, which allows banks to tap short-term loans from the Fed. It has encouraged big banks to begin using the program, in an attempt to overcome stigma associated with using the discount window, and the nation’s biggest banks said on Monday night they had each utilized the program. Regulators have also been providing limited regulatory relief to banks to keep credit flowing.

In the wake of the 2008 financial crisis, they had forced big banks to hold on to trillions of dollars in assets that are very easy to trade in case a crisis forced them to raise cash quickly. On Tuesday, regulators told the banks they can start to sell off some of those instruments and encouraged them to use the cash to lend to struggling businesses.

But investors have been clamoring for more, especially as the commercial paper market seized up.

“This Fed facility ensures that companies can get the overnight funding they need to meet short-term obligations like payroll,” said Ernie Tedeschi, policy economist at Evercore ISI, calling it “obviously a positive step, obviously necessary.”

“The only surprising thing is that it took them this long to do it,” he said.

As companies have struggled to raise cash by issuing commercial paper, it has threatened to set off a chain reaction. Firms have been drawing on lines of credit and pulling money from prime money-market mutual funds to secure cash. Those money funds — low-yield, safe investment vehicles — need to sell their commercial paper holdings to give back cash, but that’s hard to do in a barely functioning market.

As investors and corporations become concerned about the availability of cash, it could trigger an even bigger rush for it. That’s putting pressure on banks to free up their own liquidity to meet demand, which keeps them from serving as an intermediary in other crucial markets. The result is that the gears of the financial system are beginning to get stuck, hampering trading in everything from Treasuries to corporate debt.

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