New Fed lending program starting

It aims to target midsize ventures

Federal Reserve Chair Jerome Powell pauses during a news conference, Tuesday, March 3, 2020, to discuss an announcement from the Federal Open Market Committee, in Washington. In a surprise move, the Federal Reserve cut its benchmark interest rate by a sizable half-percentage point in an effort to support the economy in the face of the spreading coronavirus. Chairman Jerome Powell noted that the coronavirus "poses evolving risks to economic activity." (AP Photo/Jacquelyn Martin)
Federal Reserve Chair Jerome Powell pauses during a news conference, Tuesday, March 3, 2020, to discuss an announcement from the Federal Open Market Committee, in Washington. In a surprise move, the Federal Reserve cut its benchmark interest rate by a sizable half-percentage point in an effort to support the economy in the face of the spreading coronavirus. Chairman Jerome Powell noted that the coronavirus "poses evolving risks to economic activity." (AP Photo/Jacquelyn Martin)

WASHINGTON -- Federal Reserve Chairman Jerome Powell acknowledged Friday that the Fed faces a major challenge with a program that will lend to companies other than banks for the first time since the Great Depression.

The Fed's Main Street Lending program is geared toward medium-size 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 $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 the Main Street program will make its first loans in a "few days." He has previously set Monday 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.

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"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 University 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.

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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 $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 the Main Street program won't be required to keep their employees. Instead, they will be required to make "commercially reasonable" efforts to hold on to their workers. That has brought criticism from Sen. Elizabeth Warren, D-Mass., that Powell and Treasury Secretary Steven Mnuchin, who has backed the effort, haven't done enough to ensure that the program will protect jobs.

Powell said Friday that the Main Street program loans are intended for companies that were healthy before the pandemic hit and that likely will 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 $75 billion to offset losses.

Mnuchin had initially indicated that the Treasury Department 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 department was willing to take losses on the new loans.

The Fed has reacted to the sharp downturn in the economy by lowering short-term interest rates to near zero and buying $2 trillion in Treasury securities and mortgage-backed bonds to keep credit markets functioning. It also has announced 11 lending programs that are intended to support borrowing by businesses, banks and households.

Roughly 30 million Americans -- about 1 in 5 workers -- are receiving unemployment aid, a result of widespread business shutdowns and record drops in consumer spending. All states have begun phased reopenings 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.

Business on 05/30/2020

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