The Fed in the morning announced it would reopen the so-called Commercial Paper Funding Facility to underwrite the short-term loans that companies often use to pay for their operations, a key financial market backstop first set up 2007 to 2009.

At day’s end it extended its reach as the economy’s lender of last resort to the two dozen Wall Street primary dealers who are critical to the functioning of bond and other financial markets. By letting those companies pledge municipal bonds, corporate debt and equity securities as collateral for 90-day Fed loans, the Fed aimed to keep credit flowing to parts the economy that may face an unfolding nationwide cash crunch.

The actions were approved by the US Treasury Secretary under emergency rules that broaden the Fed’s lending powers beyond the banks that are its usual customers. The move came as US officials sought to prevent public health steps such as business shutdowns from causing widespread economic harm.

Fed Chair Jerome Powell and House Speaker Nancy Pelosi discussed efforts that might be put into play by the Fed or other branches of the US government, according to a Pelosi spokesman. Debates about other facilities were ongoing, and US elected officials were contemplating hundreds of billions of dollars of relief in the form of checks mailed to every household.

While highly technical, the commercial paper program was a critical piece of the Fed’s response to the financial crisis a decade ago, at its peak in January 2009 providing US$350 billion to banks, insurance companies, the financing arms of automakers, other manufacturers and other businesses.

The measure was welcomed by analysts and helped stock markets rise more than 4 percent following a dramatic selloff over the past week.

The US central bank has been forced to take several emergency actions over the past two weeks to keep the economy afloat. On Sunday, it slashed interest rates to near zero and pledged hundreds of billions of dollars in asset purchases.

The Fed may still have more to come, with policymakers voicing support for other types of lending, and the New York Fed expanding yet again the short-term funding it is making available to financial firms.

The amount offered in “repurchase” agreements will now be $1 trillion daily, half in the morning and half in the afternoon - an amount that may be mostly symbolic as firms have so far only tapped a fraction of what the Fed has offered.

In comments to CNN International, Minneapolis Fed President Neel Kashkari said his expected outlook is for a “mild” recession, but nothing would be certain until the virus is under control.

“The question is are we going to follow the path of South Korea and Japan, which seem like they’ve done a good job so far managing the crisis without shutting down their economies? Or are we going to head to Italy and Spain, where we would have to shut down our economy effectively for the foreseeable future? That could lead to a very, very deep recession.”

Stress in the commercial paper market in recent weeks raised worries that the intensifying efforts made to slow the spread of the virus could leave companies stranded without cash flow or an easy and cheap way to borrow - forcing them towards layoffs or worse.

Going the social distance

Analysts said the Fed’s step was a welcome one, but that both the central bank and elected leaders may need to go further to combat what one called the “social distancing recession.”

Health officials have said the best way to slow the spread of COVID-19 is for people to stay away from each other, advice that has led to a quarantine in San Francisco, and the ordered closing of schools, restaurants and bars in other cities.

The Fed’s action today “is a smart move...The advantage now is we can stop conditions from getting worse,” in important funding markets, said Gregory Faranello, head of US rates at Amerivet Securities in New York.

To truly buffer against trouble to come, however, may require more aggressive steps if the estimated 35 million people in the US restaurant, entertainment and related industries start to get laid off in large numbers, said David Kelly, chief global strategist at JPMorgan Asset Management.

“The question is are authorities doing all that they can to soften the blow of the social distancing recession?,” Kelly said. “I don’t think we’re there yet...There’s going to be a lot of human misery out there.”

The Fed at least felt its moves today could keep corporate cash flow troubles from deepening into problems of solvency.

“An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak,” the Fed said in a statement issued Tuesday morning.

Even as the program was rolled out, policymakers flagged they were ready to do even more to put the power of the Fed’s purse to work to blunt what many economists argue is now a recession in all but name.

Cleveland Fed President Loretta Mester said in a statement that if markets continue to show stress, she would support restarting other programs from the 2007 to 2009 era such as the Term Auction Facility to provide more flexible lending to banks.

“Lack of liquidity in financial markets is a first-order problem that can reverberate through the financial system and the economy,” she said.

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