Federal Reserve launches corporate debt purchases to tackle coronavirus fallout
The US Federal Reserve has continued its dramatic intervention in the markets with a pledge to buy short-term corporate debt to help ease the strain on companies amid the coronavirus outbreak.
The Fed will relaunch the financial crisis-era system and buy up so-called commercial paper directly from firms that issue it.
Companies use commercial paper markets to issue debt for periods of usually less than a year to cover their short-term funding needs.
However, the market has all but dried up in recent weeks as investors fear companies will not be able to pay them back as coronavirus takes a toll on the economy.
The Fed said its move will loosen up the market again and give firms access to much-needed cash.
“By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market,” the Fed said in a statement.
“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 major step came on the heels of two emergency interest rate cuts that took the target range to zero to 0.25 per cent. The Fed also launched a $700bn quantitative easing programme where it creates digital money to buy government bonds and mortgage securities.
However, the moves have had little effect on the US stock market, with Wall Street yesterday suffering its biggest fall since the Black Monday crash of 1987 as the S&P 500 fell 12 per cent.
Investors are almost solely focused on the spread of the virus and believe that only a huge fiscal stimulus package will do to support the economy as people self-quarantine and offices, factories and businesses close.
US President Donald Trump is reportedly pushing lawmakers to sign off on an $850bn stimulus, which would be akin to the packages unveiled in the financial crisis.
Treasury Secretary Steve Mnuchin said he had approved the Fed’s move and said he would provide $10bn from a fund for exchange stabilisation.