”That does present some moral hazard but a lot will depend on how these programs are executed and how they’re unwound,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “Are they executed in a way that doesn’t unduly benefit people? If the programs are devised effectively, hopefully that won’t be the case.”

The Fed has deployed nearly every tool in its toolbox since March to try and help keep lending flowing in the economy -- as businesses shuttered to stem the spread of the virus. It’s unleashed programs used in the 2008-2009 financial crisis to improve liquidity in the Treasury and credit markets, and reached into unchartered territory to support American businesses, states and local governments.

In its latest announcement, the Fed laid out details of the heavily anticipated Main Street Lending Facility, which will deliver funding to companies much bigger than those yet eligible for help. Eligible borrowers can have up to 10,000 employees or up to $2.5 billion in annual revenue. Loan sizes will range from $1 million to $150 million.

Borrowers will be subject to restrictions imposed by the $2.2 trillion stimulus package that Congress passed in the CARES Act including on employee retention, distribution of dividends and other factors. The program will be backstopped by $75 billion from the Treasury to absorb losses. Banks that handle the loans will be required to retain a 5% interest in each loan, with the facility purchasing the remainder.

Fallen Angels
In a move that surprised some investors, the central bank will also expand its bond-buying program to include debt that was investment-grade rated as of March 22 but was later downgraded to no lower than BB-, or three levels into high yield. It’ll also buy exchange-traded funds, the preponderance of which will track investment-grade debt along with some that track speculative-grade debt. Together, the programs will support as much as $850 billion in credit.

“The reason the Fed had to expand the pool of credit that they are willing to buy is that so many borrowers are slipping into these lower-rated categories,” said Mark Vitner, senior economist at Wells Fargo Securities. “This is aimed more at fallen angels rather that dastardly devils.”

The Fed also said it will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

Other Highlights
• The Municipal Liquidity Facility will offer as much as $500 billion in lending to states and municipalities
• The Main Street Lending Program will “ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans.”
• The expanded Primary and Secondary Market Corporate Credit Facilities and the Term Asset-Backed Securities Loan Facility will support as much as $850 billion in credit.
• The Fed will starting the Paycheck Protection Program Liquidity Facility, “supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses.”

--With assistance from Benjamin Purvis, Steve Matthews and Catarina Saraiva.

This article was provided by Bloomberg News.

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