WASHINGTON (AP) — Federal Reserve Chair Jerome Powell acknowledged Friday that the Fed faces a major challenge with the launch in the coming days of a program through which the Fed will lend directly to private companies 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 loans 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 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, the first time since the 1930s that the central bank has lent to companies outside the financial system.
“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.
The Fed has reacted to the sharp downturn in the economy by slashing short-term interest rates to near zero and buying $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.