It’s the latest Fed intervention as the outbreak clobbers markets.
The Federal Reserve announced a new emergency strategy to help support the flow of credit to U.S. households and businesses as the novel coronavirus outbreak hammers the economy, establishing a commercial paper fund similar to what was implemented for the 2008 financial crisis.
“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 Fed’s board of governors said in a statement on Tuesday. “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.”
Commercial paper is a type of short-term, unsecured debt issued by a company. As part of its creation, the U.S. Treasury will provide $10 billion in credit protection to the Federal Reserve.
“The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak,” the Fed board added. “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.”
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 statement said.
It’s the latest move by the Fed to help lessen the economic blow of the COVID-19 pandemic.
On Sunday, the Fed made a surprise announcement that it’s slashing interest rates to near zero and spending $700 billion to buy Treasury and mortgage bonds to help buoy the economy amid the pandemic.
Despite the intervention, U.S. financial markets plunged Monday, suffering their worst day since the “Black Monday” crash of 1987.