While Congress may be in talks to pass another stimulus plan, its impact on businesses would be limited without a parallel effort from the Federal Reserve, which the Fed announced Thursday.
The Fed introduced a raft of new measures aimed at making loans to midsize companies more widely available, including bolstering the effectiveness of the U.S. Small Business Administration's $349 billion Paycheck Protection Program (PPP), which has received widespread criticism for its chaotic rollout.
Through its new lending facility for banks, dubbed the Paycheck Protection Program Liquidity Facility (PPPLF), the Fed will extend credit to eligible financial institutions that originate PPP loans, freeing up their balance sheets, so they can make additional loans.
The Fed also announced new details for its highly anticipated Main Street Lending Program, which is geared specifically toward small and midsize businesses. The central bank estimates its latest moves could provide up to $2.3 trillion overall in loans to support the economy.
"The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure the eventual recovery is as vigorous as possible," Federal Reserve Board Chair Jerome H. Powell said in a statement.
The Fed has its work cut out for it, says Dean Baker, a senior economist at the nonpartisan Center for Economic and Policy Research in Washington, D.C. "You have a lot of businesses that are going to be largely shut down for two to three months," Baker says. "This is going to be life and death for a lot of businesses."
What to know about the new loan program
For businesses employing up to 10,000 workers or with revenues of less than $2.5 billion, the Fed's Main Street Lending Program could be a vital lifeline. The U.S. Treasury Department will direct $75 billion in funds from the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, to the program, which will purchase up to $600 billion in loans.
According to the Fed, eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses that were in good standing prior to the crisis. Banks will retain a 5 percent share, with the remainder being sold to the Main Street program.
The loans themselves, which don't require a borrower to put up assets as collateral, must be repaid in four years and companies that apply must commit to making what the Fed called "reasonable efforts" to maintain payroll and retain workers. Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act.
A few key details remain unclear about the new program. For starters, the timeline for its rollout. There's a comment period from now until April 16. However, the term sheet for the program refers to all loans made after April 8 as eligible, provided they meet other criteria.
Additionally, while the Fed says firms that have taken advantage of the PPP may also take out Main Street loans, it did not provide details on the firms' minimum size. That leaves open the question of whether sole proprietors, self-employed business owners, and companies with fewer than 50 employees may apply.
The central bank notes further that the minimum loan size will be $1 million, but it has not yet specified how much interest companies will be expected to pay, other than to say that rates will be variable. It did say borrowers can defer their principal and interest payments for one year.
After news broke recently that the Federal Reserve was developing a stimulus package, Joe Brusuelas, chief economist at RSM, a consultancy focused on middle-market businesses in Chicago, said he expects the loans would come with "bargain basement" interest rates of 2 to 2.5 percent. He anticipates the program eventually will result in as much as $1 trillion in new loans for midsize companies. Brusuelas expects that, like the PPP, the Main Street Lending Program is likely to be oversubscribed, and Congress may need to devote more funding to it.
"The Fed moved robustly this morning to provide up to $2.3 trillion in liquidity," says Brusuelas. "The main takeaway from this is the Fed's not done yet."