The March employment report will show a hit to the U.S. job market due to the novel coronavirus pandemic, but it is unlikely to show the depth of the crash because the data reflect the month’s first weeks.
The Federal Reserve will use emergency powers to establish a Commercial Paper Funding Facility for the first time since the financial crisis.
The program, made in partnership with the Treasury, will let the central bank buy up commercial paper, a short-term debt instrument used by firms to pay regular business expenses.
The decision followed "considerable strain" on the lending market, the Fed said in a statement, adding that a strong commercial paper market will help businesses maintain employment as the country braces for the coronavirus’s economic fallout.
The announcement lifted stocks through the day, with major indexes up strongly in the following hours.
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The Federal Reserve is reviving a financial-crisis era stimulus measure to ease cash constraints among US companies hit by the coronavirus’s economic fallout.
The central bank is employing emergency powers to set up a Commercial Paper Funding Facility in partnership with the Treasury, according to a Tuesday morning statement. The facility will allow the central bank to buy commercial paper issued by businesses. Funds gained through the short-term debt instruments are typically used for day-to-day business expenses.
The Treasury will front $10 billion worth of credit protection for the CPFF through its Exchange Stabilization Fund, according to a statement. Such a program was last used in the wake of the 2008 financial crisis, when lending conditions were even harsher. Legislation enacted after the Great Recession required the Fed to gain permission from the Treasury to buy commercial paper.
Investors’ recent rush to cash and cash-like assets amid heightened market volatility has stifled liquidity for US businesses even as the central bank pumps trillions into money markets through separate operations. The commercial paper market has seen "considerable strain" from the massive capital flows, and the new facility "should encourage investors to once again engage in term lending" with businesses, the central bank said.
"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 Fed said in a press release. "An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak."
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The action helped boost stocks through the day, with major indexes up strongly in the hours following the announcement.
The facility’s creation comes after numerous stimulus actions from the central bank. The Fed slashed its interest rate near zero on Sunday to boost lending activity, while the bank’s New York chapter has injected trillions of dollars into money markets since last week.
The central bank also announced Sunday it would purchase at least $700 billion in Treasuries and mortgage-backed securities to keep credit healthy amid a slowdown in economic activity. The US’s policy response to coronavirus risks may determine whether or not the slump will turn into "a traditional and longer-lasting recession event," JPMorgan analysts wrote Friday.
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