Now that almost a year has passed since the Covid-19 pandemic decimated U.S. financial markets and simultaneously triggered the worst recession since World War II, it looks like an economic recovery is finally underway, which prompted the Federal Reserve to withdraw some of its support.
On Monday, the Federal Reserve announced it would let three of its emergency loan programs expire as scheduled at the end of March, including the money market mutual fund liquidity facility, the funding facility commercial paper and the primary brokerage credit facility. The loan programs were unveiled in March last year in response to the sudden and abrupt market collapse that left investors with very little cash. However, with markets now stabilized, the central bank plans to withdraw some of its support, citing low utilization.
The three credit facilities were part of a larger plan to inject stability into a financial system left in shambles after the start of the pandemic. The emergency facilities were introduced as part of unprecedented powers that gave the Federal Reserve a torrent of unlimited asset purchases, as well as cutting interest rates to near zero. While the last two projects are unlikely to be gone anytime soon, the more geared credit facilities have already been the subject of controversy and, as a result, only low adoption has been recorded throughout the pandemic.
The three loan facilities in particular made headlines when former Treasury Secretary Steven Mnuchin rejected calls by the central bank to renew emergency loans after the December 31 expiration, under continued pressure from Republican lawmakers. The Federal Reserve feared that an early withdrawal could translate into increased volatility at a time when financial markets were still fragile. However, as the market recovery continued to gain momentum, investors and businesses were able to access liquidity through other means, such as private markets.
This resulted in a significantly lower level of utilization compared to the funds earmarked for the credit facility. As reported by the Financial Times, only 3.5%, or $ 90.9 billion of the Federal Reserve’s minimum $ 2.6 trillion safety net, has been used as of March 3, 2021. With the expiration of Three facilities at the end of the month, there will be only one program left: the Paycheck Protection Program liquidity facility, which the Fed has announced will be renewed until June.
Information for this briefing was found via the Financial Times. The author has no title or affiliation related to this organization. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author does not hold any license.