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Jerome Powell went ID-4 on Thursday, telling the world that the Federal Reserve is prepared to do whatever it takes to help the US recover. In fact, J-Poww was so jacked up, he announced an additional $2.3T will be made available to US economic recovery efforts. Ok, maybe he thought about it a little bit before the announcement.
The new funding will help states, cities and mid-sized companies who are on the struggle bus thanks to coronavirus, as well as companies whose bonds have recently, or will soon be downgraded. Looking at you Ford! Basically, it looks to provide funds to a large group of revenue-generating entities that were short-changed the CARES act.
Let’s break it down
In total, the Fed is either expanding or initiating nine programs that will distribute loans to large and medium-sized corporations, in addition to supporting banks who lend to small businesses covered in the CARES act. It’s probably not a good sign that the total “additional” funds are more than the “original” but alas, here we are.
$600B is being set aside for “mid-sized” businesses with less than 10k employees and under $2.5B in revenue. These loans will be at least $1M, and up to $25M. Additionally, another program will make $500B available to states and cities in the form of loans.
Jerome made it very clear that the funds from the Fed were loans, not grants, and being given out to companies who are solvent, and are expected to be paid back.
Arguably the most noteworthy initiative of the wide-ranging stimulus announcement, is that the Fed will begin buying junk-rated bonds, along with ETFs that focus on high yield debt. Before Thursday Jerry Interest Rates had vowed to stick to investment-grade corporate debt. But desperate times call for desperate measures, so Jerry and the Fed will make exceptions for so-called "fallen angels" (companies whose debt got downgraded recently because of the current situation).
The Fed’s balance sheet has grown to $6T, up from $4.2T in February. But the checkbook isn’t going away as Congress and the Treasury are backing a portion of any funds it might lose during this lending period. Not bad references to have.
The bottom line...
This is the first time the Fed has gone to this extent to help businesses themselves. Even in 2008, the Federal Bank let the White House and Congress determine what companies would get funding. So what’s different now? Credit.
The Fed is looking to act as either the direct lender or support lenders so that they can continue extending credit to those who need it. If credible businesses need loans, or banks need to support their balance sheet, the funds will be available.
This is a sign that the Fed plans to do anything (and we do mean anything) necessary to keep the economy from completely coming off the rails. Andy King would be proud.
Fed Expands Corporate-Debt Backstops, Unveils New Programs to Aid States, Cities and Small Businesses [WSJ]
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