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The Federal Reserve's Coronavirus Response Just Jumped to the Next Level

By Matthew Frankel, CFP® – Updated Apr 9, 2020 at 10:02AM

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If you thought the central bank was out of tools to support the U.S. economy amid the COVID-19 pandemic, think again.

The Federal Reserve has said that it is committed to doing whatever it takes to help the United States weather the economic storm caused by the COVID-19 pandemic. On Thursday morning, the central bank showed just how serious it is. 

Its latest move to help bolster the economy involves a massive $2.3 trillion lending program.

Exterior of Federal Reserve building.

Image source: Getty Images.

Included in this amount is a massive $600 billion "Main Street" business lending program, which will make loans ranging from $1 million to $25 million to help companies survive the coronavirus recession, and position them to be able to resume operations once we get to the other side of the social-distancing shutdowns.

To qualify for the lending program, U.S. businesses need to have less than $2.5 billion in 2019 revenue and 10,000 or fewer employees. So, any small- or medium-sized business in the United States could apply.

These will be low-interest loans, with principal and interest deferred for one year. The Fed will buy 95% of each loan and the originating bank will retain the other 5% to give it some skin in the game.

This new program is designed to complement the Paycheck Protection Program lending initiative, which is offering $350 billion in partially forgivable loans. Companies that have already taken out PPP loans will still be eligible for this new program, and participation in it requires companies to "make reasonable efforts to maintain payroll and retain workers."

There's more

The Fed also plans to inject money into the economy in other ways. Most notably, it will offer as much as $500 billion in loans to states and local governments. In other words, the Fed intends to purchase state and municipal government bonds for the first time ever.

The Fed will also expand existing credit facilities, including the Term Asset-Backed Securities Loan Facility (TALF), to a total of $850 billion to increase credit availability for both businesses and individuals.

The Treasury is providing a backstop to the announced programs to help protect against losses, including by using funds from the CARES Act (the official name of the recently passed stimulus bill).

"The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity," said Fed Chair Jerome Powell, "and our actions today will help ensure that the eventual recovery is as vigorous as possible."

For investors, this all should come as welcome news. After all, there was significant concern that the Fed was "out of ammunition" after it slashed benchmark interest rates to zero and announced its previous quantitative-easing measures. These moves clearly show that's not the case.

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