When the coronavirus pandemic locked up capital markets and pulled the economy into recession, the Federal Reserve took aim with a $2.3 trillion bazooka to try to help. Thus far, though, the central bank has only fired off surprisingly few rounds.
In the three months since a slew of programs were announced, the Fed has loaned out just $143 billion, or a mere 6.2% of its total firepower. The most ambitious initiative, the Main Street Lending Program, has yet to make a loan, according to the most recent Fed balance sheet data, though officials expect that to change in a matter of days.
As for the rest of the measures, from municipal lending to corporate credit to the Fed's role in the Paycheck Protection Program, there are several likely explanations for why what was supposed to be an infusion of cash into the economy instead has been a comparative trickle.
One is simply that the programs, particularly in the case of Main Street, are complicated and have proven difficult to launch as the Fed gathers feedback and works through logistics. Another is that there is simply less demand from entities that are finding other ways to make do. And on that same point, the notion that the U.S. economy is recovering more quickly than expected from a recession that began in February has negated the need for the arsenal that the Fed launched starting in March.
"The economy is getting better, so you're not seeing as many firms short of cash as you'd seen in March and April," said Yiming Ma, an assistant finance professor at Columbia University Business School. "Some of the terms are just not very attractive to firms who potentially do need the funds."
Slowness in getting out of the gate is not unique to the Main Street program.
The Fed has doled out just $16 billion through a municipal lending facility that has a $500 billion capacity. The central bank's role in the Payroll Protection Program, which has loaned out $515 billion through the Small Business Administration, has come to just $57 billion in loans it makes to banks that participate in the PPP.
Purchases of corporate bonds have come to $7 billion so far and the Fed also has yet to make any loans through the new version of its Term Asset-Backed Loan Facility, even as the corporate credit programs have a ceiling of $850 billion. The Fed has loaned out $25.6 billion through its money market facility.
Fed watchers had expected that with all the firepower at the central bank's disposal, the asset holdings would expand the balance sheet from its pre-crisis levels below $4 trillion to as much as $10 trillion.
Instead, last week saw a modest contraction in the balance sheet, possibly indicative that "the rollout of the new 13(3) lending facilities has so far been a disappointment," Andrew Hunter, chief U.S. economist at Capital Economics, said in a note. (Section 13(3) of the Federal Reserve Act gives the central bank its emergency lending powers.)
"That partly reflects the logistical challenges the Fed has faced in trying to roll out so many new tools at once," Hunter added. "But there are also early signs that demand for the new facilities has been relatively muted, perhaps because the terms on offer have proved relatively unattractive."
On the Main Street initiative in particular, the Boston Fed, which is administering the program, is reporting robust demand from businesses so far. However, the interest from banks has been considerably less.
Boston Fed President Eric Rosengren said Friday that about 200 institutions have registered for participation out of nearly 4,500 commercial banks across the U.S. That's come even though Main Street terms have been adjusted to where the Fed now will assume 95% of the loan amounts, which are targeted to range from $250,000 to $300 million for businesses with fewer than 15,000 employees.
"Many more lenders have inquired about the program and attended our outreach sessions, so we anticipate that many institutions will register for the program given its benefits to them, their customers, and the markets where they operate," Boston Fed spokesman Joel Werkema said in response to an email inquiry. "Lenders have a vested interest in the resilience of the businesses in their market, and this program gives them a way to help bridge those businesses that were sound before the pandemic to better days."
Market enthusiasm remains for Main Street, despite the logistical hangups in getting it started. One issue cited as problematic are the payment terms — 3% above the Libor overnight lending rate, which some say is too low a return for banks and too high a premium for troubled borrowers.
"Should the uptake not be what the central bankers want, there is ample room for reform of the program's basics," Joseph Brusuelas, chief economist at RSM, said in a note. "The creation of the Main Street Lending Program represents the first modern attempt to create a market for firms that constitute the beating heart of the real economy."
The municipal facilities also have seen relatively low levels of interest, possibly because short-term loans aren't much use to cash-strapped state and local governments that will have longer-range challenges to balance their books.
In addition to ramping up Main Street, the Fed also is continuing its intervention in the corporate bond market and now is getting ready to add individual bonds to a portfolio of exchange-traded funds it already has started to accumulate. Those purchases thus far have involved bonds already on the market; a primary market facility has yet to begin.
In the meantime, the Fed is scooping up government and agency debt, with minimum purchases of $120 billion a month.
Still, Hunter said that if tepid interest in the other facilities persists, the Fed may be required to step up its bond purchases to help keep financial conditions loose. While the central bank's balance sheet remains above $7 trillion, due primarily to massive bond buying this year, last week's decline marked the first since mid-March when the crisis began.
"Unless demand for those new facilities stages a major upturn, it may not be long before Treasury purchases are ramped up once more," Hunter said.
Financial conditions on balance remain accommodative, due in good part to the remarkably strong stock market rally that began when the Fed initially announced the corporate credit facilities on March 23.
Indeed, Fed Chairman Jerome Powell has pointed out that the mere stated intention to buy corporate bonds was enough to loosen up the market. Corporate bond issuance has come at breakneck speed over the past three months and has been across the broad, including a surge in high-yield junk offerings.
And despite what could be seen as a lukewarm reception for the Fed's products, the central bank by and large has scored high points from investors and congressional lawmakers for the immediacy and intensity of its response to a collapse in market functioning during the pandemic. That's come even amid concerns over the moral hazard of such aggressive interventions, which included pulling benchmark short-term interest to near zero, where they were during the financial crisis.
"They did what governments do, which is just flood as much money into the economy as possible and hope that less is taken up," said Peter Boockvar, chief investment officer at the Bleakley Advisory Group. Boockvar has been critical of some of the Fed's actions, particularly in the corporate bond market. "I think it was really difficult to know dollar-wise what the right amount was going to be. They tried to take a worst-case scenario and if those worst-case scenarios don't come to fruition, there's money left."
If in fact the economy doesn't need all that the Fed has put at its disposal, then that becomes a victory. However, if the reason for the slow uptake is for fundamental issues with the programs, that's a different story.
"The speed and magnitude that they acted on in the beginning was just phenomenal," said professor Ma, of Columbia University. "The Fed did an amazing job in the beginning of really preventing freezes in the credit market that would have really turned this economic crisis into a deeper financial crisis. It's very early to tell on the success or failures of these programs."