Please ensure Javascript is enabled for purposes of website accessibility

Fed Will Lend Directly to Businesses for First Time Since Great Recession in Coronavirus Response

By Matthew Frankel, CFP® - Updated Mar 17, 2020 at 5:26PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Fed just used another weapon from its arsenal to help stabilize financial markets

For the first time since the 2008 financial crisis, the Federal Reserve is getting into the corporate paper market, announcing a credit facility of as much as $1 trillion to buy short-term corporate debt securities.

In a nutshell, "commercial paper" is a term for short-term borrowing by corporations. Specifically, the just-announced program will buy three-month paper (think of this as ultra-short-term corporate bonds) and will charge interest to the borrowing companies.

The ability for companies to borrow on a short-term basis is critical to a healthy economy. The commercial paper market allows the borrowing companies to pay employees and customers, and to conduct other vital business functions. During turbulent times, issuers of commercial paper can find it difficult to use the open market, and if there's no short-term corporate credit availability, it can be a big problem for the companies who need it.

Exterior entrance of a Federal Reserve building.

Image source: Getty Images.

An aggressive week for our central bank

This is just the latest of three aggressive moves made by the Federal Reserve this week, and it appears that the central bank is prepared to use all of the tools at its disposal to help the U.S. economy weather the coronavirus storm and the recession that has likely already started.

On Sunday, the Fed suddenly cut its benchmark federal funds rate to near-zero levels, which followed another 50-basis-point rate cut just a couple weeks earlier. Along with the 100-basis-point rate cut, the Fed also announced a $700 billion quantitative easing program, committing to buy $500 billion in Treasury securities and $200 billion in mortgage-backed securities in order to inject liquidity into the market.

Then, on Monday, the Fed announced that it was conducting a $500 billion repo operation, ensuring the availability of capital to the financial industry. In a nutshell, the banks have indicated that they want to help during this unprecedented crisis, and the Fed wants to make sure the banks have the capital they need.

Is the Fed out of ammo now?

It may seem like the Fed is using up its available tools quickly. After all, interest rates have now been reduced as far as they can go, unless the Fed decides to use a negative federal funds rate -- a move Chair Jerome Powell has said isn't being considered.

However, don't be so sure that the Fed doesn't have anything else it can do if the coronavirus crisis (and its effect on the economy) gets even worse. For one thing, its quantitative easing program could get much bigger. In fact, in the aftermath of the financial crisis, the Fed accumulated almost $4 trillion worth of assets over three separate rounds of quantitative easing. And the Fed could expand its purchases from government-backed securities like Treasuries to things like long-term corporate bonds or even common stocks.

So, while this week has certainly been an aggressive one for the Federal Reserve, the central bank could potentially still have some tricks up its sleeve if it needs them.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.