The Federal Reserve is ending the bulk of the remaining emergency facilities it rolled out last year to support financial markets through the coronavirus crisis, in the latest sign that the economic recovery is gathering momentum.
The US central bank announced on Monday that it will allow three lending programmes to expire as scheduled at the end of the month, citing low usage. The Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility were launched in March last year to combat turbulent trading conditions that engulfed markets when investors scrambled to hold cash.
The facilities were part of a larger effort by the Fed to stabilise the financial system — resulting in the central bank expanding the scope and scale of its reach in an unprecedented way. They were created under powers that allow the Fed to make asset purchases in “unusual and exigent circumstances”, and funds from the US Treasury to cover losses dramatically boosted their potential size.
Slashing interest rates to zero and committing to an unlimited asset purchase programme formed the bedrock of the Fed’s wide-ranging response to last year’s crisis, playing an important role in diverting a larger financial shock. Neither policy is likely to be wound down soon.
But other schemes took a more direct aim at the markets for corporate credit and municipal debt, and at lending for small and midsized businesses.
Those lending facilities in particular became the source of controversy in November, when former Treasury secretary Steven Mnuchin ignored the Fed’s warnings and refused to renew them beyond their expiration date of December 31 in the face of pressure from Republican lawmakers.
Top Fed officials and investors had worried that a premature pullback in the central bank’s support could prompt a resurgence in volatility at a fragile time for the economy. But as the financial recovery sped along, companies and investors regained access to much-needed funding through private markets.
As a result, the Fed has deployed only a fraction of the money earmarked for its 13 facilities. According to Financial Times calculations based on Fed data published up to March 3, just $90.9bn of the central bank’s firepower has been used, or 3.5 per cent of the minimum $2.6tn the Fed said it would make available. Usage peaked in July at $107bn.
The expiration of the remaining facilities this month will leave just one programme active. The Fed said on Monday it would renew the Paycheck Protection Program Liquidity Facility, which extends credit to eligible financial institutions that originate PPP loans, through to the end of June.
“The extension will provide continued support for the flow of credit to small businesses,” the central bank said in a statement.
Bank executives and investors are also awaiting clarity from the Fed about concessions on capital requirements.
US regulators must decide by the end of the month whether to renew a rule change that allowed banks to exclude government bonds and cash reserves when calculating their so-called supplementary leverage ratio. The SLR requires large banks to have capital equal to at least 3 per cent of their assets, or 5 per cent for the largest, systemically important institutions.
The exemption was introduced in April 2020 to encourage banks to lend to cash-strapped businesses and consumers and to stabilise volatile financial markets. Market participants have warned that some of the balance sheet constraints that forced banks to pull back their activity at the height of the crisis last year could return.