• Commercial paper funds everything from auto loans and mortgages to the operational needs of businesses
  • The Fed action Tuesday followed a full point cut to the federal funds rate and announcement of $700 billion in quantitative easing
  • The Fed said banks now are in a much better position to keep credit flowing than they were at the start of the Great Recession

In its third emergency action this week, the U.S. Federal Reserve Tuesday said it would move to keep credit flowing to businesses and households by buying up commercial paper, which finances everything from auto loans and mortgages to the operational needs of businesses.

The announcement came as members of the Federal Open Markets Committee were to convene for their regular two-day meeting and as economists were indicating a recession likely already was underway as a result of the coronavirus pandemic.

On Sunday, the Fed reduced its key federal funds rate by a full point to zero to 0.25% and said it would buy up $700 billion in Treasury and mortgage bonds to attempt to stem the bloodbath on Wall Street and mitigate the effects of the coronavirus on the economy.

“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 said in a press release. “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 action coincides with administration plans to seek an $850 billion economic stimulus package from Congress. Treasury Secretary Steven Mnuchin was to present the proposals Tuesday to Senate Republicans, including a payroll tax cut being sought by President Trump.

Tuesday’s Fed action unleashes the central bank’s emergency lending powers. Under the plan, the Treasury will provide $10 billion of credit protection from the Exchange Stabilization Fund.

“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. The CPFF [Commercial Paper Funding Facility] will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle that will purchase unsecured and asset-backed commercial paper rated A1/P1 [as of March 17, 2020] directly from eligible companies,” the Fed said.

In a separate statement, the Fed noted banks have doubled their capital and liquidity levels in the past decade and are safer and stronger than they were at the start of the Great Recession.

“As a result, the agencies are encouraging banks to use that strength to support households and businesses,” the Fed said.