US Fed revives commercial paper facility to boost lending

Andrew Cummings
March 18, 2020

Set up in coordination with the Treasury, which will provide $10 billion of credit production through its Exchange Stabilization Fund, the CPFF will have the power to buy unsecured and asset-backed commercial paper from eligible companies as long as the paper is rated A1/P1. To calm markets, Bank of America said the Fed may need to launch the same kind of commercial paper lending facility it used in 2008.

The Fed's commercial paper program was first established in the fall of 2008 at the height of the financial crisis, and was closed in 2010.

"An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak", the Fed added.

The reintroduction of the so-called Commercial Paper Funding Facility (CPFF) is one of a number of moves by the central bank in recent days to try to counter the adverse economic impact of the coronavirus outbreak, and the resulting turmoil in global markets, by pumping money into the real economy. That market has been under strain in recent days amid growing fears that companies suffering business disruptions due to the virus may not be able to pay back the cash.

"The goal is to prevent a larger catastrophe that includes soaring bankruptcies, unemployment and underemployment", said Joe Brusuelas, chief economist at tax advisory firm RSM.

The commercial paper funding facility will establish a special objective vehicle (SPV) that will purchase unsecured and asset-backed commercial paper from eligible companies as long as the paper is rated A1/P1 as of March 17. "While we are encouraged by this policy step, the Treasury will need to step up with other funds and bridge loans" that can help companies with lower credit ratings.

The central bank had previously cut interest rates twice, including a cut to near zero on Sunday.

The move is among a flurry of recent Fed actions meant to limit the economic impact of the coronavirus.

All told, the vehicle purchased $738 billion in commercial paper during that time.

"This action is taken to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term US dollar funding markets", the Fed's statement said.

The Trump administration is also looking at sending money to Americans affected by the new coronavirus "immediately", Mnuchin said Tuesday. That allows a wider array of banks to borrow from the Fed.

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