Federal Reserve Chair Jerome Powell acknowledged Friday that the Fed faces a major challenge with the launch in the coming days of a program that will lend to companies other than banks for the first time since the Great Depression.
The Fed’s Main Street Lending is geared toward medium-sized companies that are too large for the government’s small business lending program and too small to sell bonds or stock to the public. The individual loans, which could reach US$600 billion, will technically be made by banks. But the Fed will buy 85% to 95% of each loan, thereby reducing the risk to banks and freeing them to do more lending.
Powell said that Main Street will make its first loans in a “few days.” He has previously set June 1 as the target, or soon after.
He noted that the complexity of the program goes far beyond the Fed’s usual lending efforts, which typically involve buying bonds. The Main Street program will consist of unique loans to individual businesses.
“It is far and away the biggest challenge of the 11 facilities we have set up,” Powell said.
Speaking in an online question-and-answer session with Alan Blinder, a Princeton economist and former vice chairman of the Fed, Powell also said he worries that a second wave of the coronavirus, perhaps in the fall, would damage consumer confidence and weaken any economic recovery.
For the economy to fully recover, Powell said, Americans must be confident that they can shop, eat at restaurants or visit public places without risking infection. For that reason, he said, tracking the spread of the virus is, if anything, more important than economic data in gauging any recovery.
“A second wave would really undermine public confidence and might make for a significantly longer and weaker recovery,” the chairman said.
Addressing the Main Street Lending program, Powell said its primary goal is to help preserve jobs or make it easier for workers to find new ones. Companies with up to 15,000 employees or US$5 billion in revenue are eligible.
“That’s the point of this exercise,” he said.
Yet unlike with the government’s small business lending program, borrowers from Main Street won’t be required to keep their employees. Instead, they will be required to make “commercially reasonable” efforts to hold onto their staffs. That has brought criticism from Sen. Elizabeth Warren, D-Mass., that Powell and Treasury Secretary Steven Mnuchin, who has backed the Main Street effort, haven’t done enough to ensure that the program will in fact protect jobs.
Powell said Friday that the Main Street loans are intended for companies that were healthy before the pandemic hit and that will likely remain viable. But many Fed watchers have argued that the program won’t be very effective unless it is willing to make risky loans that might fail. The Treasury Department has provided US$75 billion to offset losses.
Mnuchin had initially indicated that the Treasury wanted all that money to be repaid, which could have forced the Fed to be too cautious. But earlier this month Mnuchin reversed himself and said the Treasury was willing to take losses on the Main Street loans.
The Fed has reacted to the sharp downturn in the economy by slashing short-term interest rates to near zero and buying US$2 trillion in Treasury securities and mortgage-backed bonds to keep credit markets functioning. It has also announced 11 separate lending programs that are intended to support borrowing by businesses, banks and households.
Roughly 30 million Americans — about one in five workers — are receiving unemployment aid, a result of widespread business shutdowns and record drops in consumer spending. All states have begun phased re-openings of their economies, which has produced some modest bounce-back in consumer spending. Still, Powell has previously said the unemployment rate is likely to peak at between 20% and 25% in May or June.
In his most recent public comments, Powell has underscored that the United States is gripped by an economic shock “without modern precedent” and that Congress must consider providing further financial aid soon to support states, localities, businesses and individuals to prevent an even deeper recession.