WASHINGTON - In an effort to prevent the U.S. economy from spiraling into a depression, the Federal Reserve launched an unprecedented effort Monday to keep money flowing to companies, small businesses, households and cities that are facing an economic crisis that threatens to surpass the Great Recession.
With restaurants, airlines, hotels, auto manufacturers and many other parts of the economy in a standstill, there's a massive need for short-term loans to help businesses survive until people can go out again. But just as this demand for loans is growing, investors are showing little appetite to buy up all this debt, preferring instead to keep cash.
The Fed is attempting to resolve this by buying unlimited amounts of U.S. Treasurys and mortgage-backed securities, an extraordinary backstop for lending markets that goes much further than what the central bank did in the 2008-09 crisis. Back then, the Fed injected nearly $4 trillion into the financial system over several years. Analysts say the Fed's effort now could dwarf that in a matter of weeks, a testament to how much pain the coronavirus is causing the economy.
The financial crunch is playing out all over the country. Rhode Island's state treasurer warned that the state is likely to run out of money in "weeks." Airlines and hotels are asking for billion-dollar loans. Companies such as Nordstrom, Kohl's, Advanced Auto Parts and TJX, the parent company of TJ Maxx and Marshalls, are tapping their lines of credit at banks, according to S&P Global Market Intelligence.
Meanwhile, layoffs continue to mount, which could push unemployment as high as 30% in the second quarter, a level worse than during the Great Depression, warned James Bullard, president of the St. Louis Fed.
"This is not about helping Wall Street, this is about helping Main Street," said economist Janet Yellen, a former Fed chair. "The availability of credit for households and businesses is essential to protect people from the worst possible economic effects."
Economists are calling Fed Chair Jerome Powell's move to shore up credit markets in recent days as doing "whatever it takes" and "throwing the kitchen sink" at markets.
President Donald Trump said he called Powell on Monday because he's "done a really good job." The praise is a noticeable departure from Trump's months of Fed bashing and desire to fire Powell, including in August when Trump called Powell an "enemy."
"I'm very happy with the job he did," Trump told reporters Monday.
U.S. markets initially jumped on the news with futures turning positive and bond markets showing less signs of stress, but the gains did not last. The Dow Jones industrial average fell 582 points, and there was still little appetite for bond purchases beyond U.S. Treasurys because so much uncertainty about the virus remains.
The central bank's actions come as Congress has stalled on a $2 trillion relief package for the nation; markets around the world tanked. On Monday, Morgan Stanley became the latest big bank warning that growth in the second quarter could be down 30%, a record-breaking slide.
"Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate," the Fed said.
Investors are looking to the Fed to provide even more money and support for the economy than Congress can, as happened during the financial crisis.
"It's very likely the real stimulus is all going to come from the Fed, and it will be with minimal oversight," said Aaron Brachman, a managing director at Washington Wealth Group.
Small-business owners are also having a hard time getting the money they need. Half of small businesses have less than 15 days' worth of cash on hand, according to the JPMorgan Chase Institute, meaning they need access to capital soon.
The Fed also announced Monday that it will buy certain corporate bonds for the first time and that it will "soon" provide a "Main Street Business Lending Program." These programs are meant to increase availability of loans to small and large businesses on top of any moves by Congress.
"Corporate bond markets, the muni bond market, even the mortgage market are frozen. They are not functioning," said Julia Coronado, a former Fed economist and founder of MacroPolicy Perspectives. "All of this is happening much more quickly than it did in 2008."
U.S. stock markets have now wiped out all the gains since Trump's election in November 2016. Yet, what has really spooked Wall Street is the fact that as people abandon stocks, they aren't running to bonds, as they normally do. They are fleeing to cash.
Investors pulled a record $12.2 billion from municipal bond funds in the week ending March 18, according to Lipper, a financial data company. That was three times the prior record. It is making states and cities nervous as many anticipate needing to borrow money as their costs skyrocket and tax revenue dries up. Los Angeles and Clark County, Nevada, which includes Las Vegas, have indicated that they anticipate massive budget shortfalls and likely borrowing in coming months.
Last week, some municipalities saw their cost of borrowing spike while yields went to 10%, a massive jump from the less than 1% yields available earlier in March, said Emily Brock, a director at the Government Finance Officers Association.
"There's just nobody there to buy the bonds," Brock said. "We want the federal government to enter that market and start to buy."
Americans also pulled a historic amount - $24 billion - in physical cash from ATMs and bank branches, Deutsche Bank reported, an indication of how worried people are. Prime money market funds, one of the closest equivalents to cash, lost 11% of their total assets as big institutional investors fled.
Even trading of mortgage securities, which is also considered a safe haven asset, nearly froze in recent days from panic selling. As clients called and wanted their money back, investment managers were forced to sell. This triggered a run on real estate investment trusts, said Walt Schmidt of FHN Financial, which exacerbated the selling since these companies are typically levered, meaning they are borrowing to invest $5 for every $1 an investor puts in the fund.
Credit markets improved slightly on Monday after the Fed's latest action, but investors remain hesitant to invest until Congress gives companies and households a cash injection to help pay their bills.
"The Fed has done historical amounts to support for the financial markets, but really, the next step has to be on the fiscal side," said Neal Epstein, a senior credit officer at Moody's.
The Fed has acted quickly to keep money flowing in the economy. Last week, the central bank slashed interest rates to zero and gave banks access to loans at a record-low 0.25%. The Fed also said it would do at least $700 billion in new bond purchases, but it is indicating a willingness to do a lot more than that.
This week, the Fed plans to purchase $75 billion worth of Treasury securities every day and $50 billion a day of mortgage-backed securities. Some of the purchases will be commercial mortgage-backed securities, an effort to ease the strain as malls and other retail hubs look increasingly at risk of bankruptcy.
"The Fed is just going to keep trying things until something works," said Eric Stein, vice president of Eaton Vance Management and former staffer on the New York Fed's markets desk in 2007-08. "My belief is that we will see much more in the weeks and months to come."
In addition to buying more bonds, a policy known as "quantitative easing," or QE, the Fed is relaunching programs to support corporate and household debt. One is the Term Asset-Backed Securities Loan Facility, which helps the market for student loans, auto loans, credit card loans and loans backed by the Small Business Administration.
All of these efforts are meant to provide ample "bridge financing," Fed officials said.
Treasury Secretary Steven Mnuchin said he is working closely with the Fed and Congress to ensure that small businesses get the loans they need quickly to survive. The bill in Congress would enable small businesses with 500 or fewer employees to get a Small Business Administration loan of about two months of payroll and some overhead expenses.
"This is a team effort to kill this virus and provide economic relief," Mnuchin said on Fox Business Network.
This article was written by Heather Long, a reporter for The Washington Post.
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