The Federal Reserve on Tuesday announced that it was setting up a special entity to purchase short-term debt issued by corporations to help keep afloat companies facing a credit crunch because of the coronavirus pandemic.
The program, the Commercial Paper Funding Facility, is authorized under the Fed’s powers to lend during emergencies and was approved by Treasury Secretary Steven Mnuchin. Its launch represents a return to the kinds of emergency stabilization measures the Fed undertook during the 2008 financial crisis to prevent a collapse of the financial system.
“Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies,” the central bank said in a statement. “By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support families, businesses, and jobs across the economy.”
“By providing short-term credit, the CPFF will help American businesses manage their finances through this challenging period,” Mnuchin said in a statement.
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Tuesday’s move by the Fed comes on the heels of it calling on banks to use their capital and liquidity buffers to help households and businesses deal with the economic effects of the coronavirus.
“These capital and liquidity buffers were designed to provide banking organizations with the means to support the economy in adverse situations,” stated the Fed in an announcement released Sunday.
U.S. banking organizations have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers. The largest banking organizations hold $1.3 trillion in common equity and $2.9 trillion in high-quality liquid assets, according to the Fed.
