Jerome H Powell: Coronavirus Aid, Relief, and Economic Security
Act
Testimony of Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve
System, before the Committee on Banking, Housing, and Urban Affairs, US Senate, Washington,
DC, 1 December 2020.
* * *
Chairman Crapo, Ranking Member Brown, and other members of the Committee, thank you for
the opportunity to update you on our ongoing measures to address the hardship wrought by the
pandemic.
Our public health professionals continue to deliver our most important response, and we remain
grateful for their service.
The Federal Reserve, along with others across government, is using its policies to help alleviate
the economic burden. Since the pandemic's onset, we have taken forceful actions to provide
relief and stability, to ensure that the recovery will be as strong as possible, and to limit lasting
damage to the economy.
Economic activity has continued to recover from its depressed second-quarter level. The
reopening of the economy led to a rapid rebound in activity, and real gross domestic product, or
GDP, rose at an annual rate of 33 percent in the third quarter. In recent months, however, the
pace of improvement has moderated.
Household spending on goods, especially durable goods, has been strong and has moved above
its pre-pandemic level. In contrast, spending on services remains low largely because of ongoing
weakness in sectors that typically require people to gather closely, including travel and
hospitality.
The overall rebound in household spending is due, in part, to federal stimulus payments and
expanded unemployment benefits, which provided essential support to many families and
individuals.
In the labor market, more than half of the 22 million jobs that were lost in March and April have
been regained, as many people were able to return to work. As with overall economic activity, the
pace of improvement in the labor market has moderated. Although we welcome this progress,
we will not lose sight of the millions of Americans who remain out of work. The economic
downturn has not fallen equally on all Americans, and those least able to shoulder the burden
have been hardest hit. In particular, the high level of joblessness has been especially severe for
lower-wage workers in the services sector, for women, and for African Americans and
Hispanics. The economic dislocation has upended many lives and created great uncertainty
about the future.
As we have emphasized throughout the pandemic, the outlook for the economy is extraordinarily
uncertain and will depend, in large part, on the success of efforts to keep the virus in check.
The rise in new COVID-19 cases, both here and abroad, is concerning and could prove
challenging for the next few months. A full economic recovery is unlikely until people are
confident that it is safe to reengage in a broad range of activities.
Recent news on the vaccine front is very positive for the medium term. For now, significant
challenges and uncertainties remain, including timing, production and distribution, and efficacy
across different groups. It remains difficult to assess the timing and scope of the economic
implications of these developments with any degree of confidence.
The Federal Reserve's response has been guided by our mandate to promote maximum
employment and stable prices for the American people, along with our responsibilities to promote
the stability of the financial system. We have been taking broad and forceful actions to more
directly support the flow of credit in the economy. Our actions, taken together, have helped
unlock almost $2 trillion of funding to support businesses large and small, nonprofits, and state
and local governments since April. This, in turn, has helped keep organizations from shuttering
and has put employers in both a better position to keep workers on and to hire them back as the
economy continues to recover.
These programs serve as a backstop to key credit markets and have helped restore the flow of
credit from private lenders through normal channels. We have deployed these lending powers to
an unprecedented extent. Our emergency lending powers require the approval of the Treasury
and are available only in very unusual circumstances, such as those we find ourselves in today.
Many of these programs have been supported by funding from the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act), and I have included detailed information about those
facilities in my written testimony.
The CARES Act assigns sole authority over its funds to the Treasury Secretary, subject to the
statute's specified limits. The Secretary has indicated that these limits do not permit the CARES
Act-funded facilities to make new loans or purchase new assets after December 31 of this year.
Accordingly, the Federal Reserve will return the unused portion of funds allocated to the lending
programs that are backstopped by the CARES Act in connection with their termination at the end
of this year. As the Secretary noted in his letter, non-CARES Act funds in the Exchange
Stabilization Fund are available to support emergency lending facilities if they are needed.
Everything the Fed does is in service to our public mission. We are committed to using our full
range of tools to support the economy and to help assure that the recovery from this difficult
period will be as robust as possible on behalf of communities, families, and businesses across
the country.
Thank you. I look forward to your questions.
Summary of Section 13(3) Facilities Using CARES Act Funding
The Municipal Liquidity Facility
The Municipal Liquidity Facility (MLF) helps state and local governments better manage the
extraordinary cash flow pressures associated with the pandemic, in which expenses, often for
critical services, are temporarily higher than normal and tax revenues are delayed or temporarily
lower than normal. This facility addresses these liquidity needs by purchasing the short-term
notes typically used by these governments, along with other eligible public entities, to manage
their cash flows. By addressing the cash management needs of eligible issuers, the MLF was
also intended to encourage private investors to reengage in the municipal securities market,
including across longer maturities, thus supporting overall municipal market functioning.
Under the MLF, the Federal Reserve Bank of New York lends to a special purpose vehicle (SPV)
that will directly purchase up to $500 billion of short-term notes issued by a range of eligible state
and local government entities. Generally speaking, eligible issuers include all U.S. states,
counties with a population of at least 500,000 residents, cities with a population of at least
250,000 residents, certain multistate entities, and revenue-bond issuers designated as eligible
issuers by their state governors. Notes purchased by the facility carry yields designed to promote
private market participation-that is, they carry fixed spreads based on the long-term rating of the
issuer that are generally larger than those seen in normal times. With funding from the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Department of the
Treasury has committed to make a $35 billion equity investment in the SPV.
The MLF was announced on April 9, 2020, and closed its first transaction on June 5. As of
November 25, the facility had purchased two issues for a total outstanding amount of $1.7 billion.
The MLF has contributed to a strong recovery in municipal securities markets, which has
facilitated a historic issuance of approximately $275 billion of bonds since late March. State and
local governments and other municipal bond issuers of a wide spectrum of types, sizes, and
ratings have been able to issue bonds, including long maturity bonds, with interest rates that are
at or near historical lows. Those municipal issuers that do not have direct access to the Federal
Reserve under the MLF have still benefited substantially from a better-functioning municipal
securities market.
The Main Street Lending Program
The Federal Reserve established the Main Street Lending Program (Main Street) to support
lending to small and medium-sized businesses and nonprofit organizations that were in sound
financial condition before the onset of the COVID-19 pandemic. These businesses and
nonprofits have good longer-term prospects but have encountered temporary cash flow
problems due to the pandemic and, as a result, are not able to get credit on reasonable terms. In
addition to providing loans for borrowers in current need of funds, Main Street offers a credit
backstop for firms that do not currently need funding but may if the pandemic continues to erode
their financial condition.
Under Main Street, the Federal Reserve Bank of Boston has set up one SPV to manage and
operate five facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan
Facility (MSPLF), the Main Street Expanded Loan Facility (MSELF), the Nonprofit Organization
New Loan Facility (NONLF), and the Nonprofit Organization Expanded Loan Facility (NOELF).
The SPV will purchase up to $600 billion in Main Street loan participations, while lenders retain a
percentage of the loans. Main Street loans have a five-year maturity, no principal payments in the
first two years, and no interest payments in the first year. Businesses with less than 15,000
employees or 2019 revenues of less than $5 billion are eligible to apply for Main Street loans.
Available loan sizes span from $100,000 to $300 million across the facilities and depend on the
size and financial health of the borrower. With funding from the CARES Act, the Department of
the Treasury has committed to make a $75 billion equity investment in the SPV.
The business facilities (MSNLF, MSPLF, and MSELF) and nonprofit facilities (NONLF and
NOELF) have broadly similar terms but differ in their respective underwriting standards. The
business facilities use the same eligibility criteria for lenders and borrowers and have many of
the same terms, while other features of the loans extended in connection with each facility differ.
The loan types also differ in how they interact with the borrower's outstanding debt, including with
respect to the level of pre-crisis indebtedness a borrower may have incurred. Similarly, the
nonprofit facilities have many of the same characteristics, but some features of the loans
extended in connection with each facility differ. Eligible lenders may originate new loans under
MSNLF, MSPLF, and NONLF or may increase the size of existing loans under MSELF and
NOELF.
Main Street became operational on July 6, 2020. The Federal Reserve and the Department of the
Treasury have modified the program several times to reflect extensive consultations with
stakeholders, most recently by lowering the minimum loan threshold and adjusting fees to make
the program more accessible. As of November 25, nearly 600 lenders representing more than
half of U.S. banking assets have registered to participate in the program, and the program has
purchased just under $6 billion in participations.
Since Main Street became operational, the number of registered lenders and the amount of loan
participations continue to increase. Program usage will depend on the course of the economy,
the demand for credit by small and medium-sized businesses, and the ability of lenders to meet
credit needs outside the Main Street program. Demand for Main Street loans may increase over
time if the pandemic continues to affect the ability of businesses and nonprofits to access credit
through normal channels and as other support programs expire.
The Secondary Market Corporate Credit Facility
The Secondary Market Corporate Credit Facility (SMCCF) is designed to work alongside the
Primary Market Corporate Credit Facility (PMCCF), discussed later, to support the flow of credit
to large investment-grade U.S. companies so that they can maintain business operations and
capacity during the period of dislocation related to COVID-19. The SMCCF supports market
liquidity by purchasing, in the secondary market, corporate bonds issued by investment-grade
U.S. companies, by U.S. companies that were investment grade before the onset of the
pandemic and remain near investment grade, and by U.S.-listed exchange-traded funds (ETFs)
whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.
Under the SMCCF, the Federal Reserve Bank of New York lends to an SPV that purchases in the
secondary market both corporate bond portfolios in the form of ETFs and individual corporate
bonds to track a broad market index. The SMCCF purchases ETF shares and corporate bonds
at fair market value in the secondary market and avoids purchasing shares of ETFs when they
trade at prices that materially exceed the estimated net asset value of the underlying portfolio.
The pace of purchases is a function of the condition of the U.S. corporate bond markets. With
funding from the CARES Act, the Department of the Treasury has committed to make a $75
billion equity investment in the SPV for the PMCCF and SMCCF, with a $25 billion allocation
toward the SMCCF.
The SMCCF staggered its launch of ETF and bond purchases in order to act as quickly and
effectively as possible. Through ETF purchases beginning on May 12, 2020, the SMCCF
provided liquidity to the corporate bond market relatively quickly. The Federal Reserve began
direct corporate bond purchases under the broad market index purchase program on June 16. In
its first week of bond purchases, the SMCCF was purchasing about $370 million per day. As of
November 25, purchases have been slowed to a current daily pace of approximately $20 million
of bonds and no ETFs, and the total SMCCF outstanding value has reached $13.6 billion.
The SMCCF's announcement effect was strong, quickly improving market functioning and
unlocking the supply of hundreds of billions of dollars of private credit. Since late March, more
than $1.6 trillion in corporate bonds have been issued without direct government or taxpayer
involvement. The SMCCF has materially reduced its pace of purchases over the past few
months as a result of the substantial improvements in the functioning of the U.S. corporate bond
markets. The pace of purchases going forward will continue to be guided by measures of market
functioning, increasing when conditions deteriorate and decreasing when conditions improve.
The Primary Market Corporate Credit Facility
The Primary Market Corporate Credit Facility (PMCCF) is designed to work alongside the
Secondary Market Corporate Credit Facility (SMCCF) to support the flow of credit to large
investment-grade U.S. companies so that they can maintain business operations and capacity
during the period of dislocation related to COVID-19. The PMCCF supports market liquidity by
serving as a funding backstop for corporate debt.
Under the PMCCF, the Federal Reserve Bank of New York lends to an SPV. The SPV will
purchase qualifying bonds and syndicated loans with maturities up to four years. With funding
from the CARES Act, the Department of the Treasury has committed to make a $75 billion equity
investment in the SPV for the PMCCF and SMCCF, with a $50 billion allocation toward the
PMCCF.
The dual announcement of the PMCCF and SMCCF was well received by the market. Between
March 23 and April 6, 2020, credit spreads for investment-grade bonds declined substantially. As
of November 25, there have not been any PMCCF transactions, nor have any indications of
interest been received. While the PMCCF has not purchased any bonds since it opened, it
serves as a backstop should markets enter another period of stress.
The Term Asset-Backed Securities Loan Facility
The Term Asset-Backed Securities Loan Facility (TALF) supports the flow of credit to
consumers and businesses by enabling the issuance of asset-backed securities (ABS)
guaranteed by newly and recently originated consumer and business loans.
Under the TALF, the Federal Reserve Bank of New York lends to an SPV. The SPV will make up
to $100 billion of three-year term loans available to holders of certain triple-A-rated ABS backed
by student loans, auto loans, credit card loans, loans guaranteed by the Small Business
Administration (SBA), and certain other assets. The Federal Reserve lends an amount equal to
the market value of the ABS less a haircut, and the loan is secured at all times by the ABS. With
funding from the CARES Act, Department of the Treasury has committed to make a $10 billion
equity investment in the SPV.
As of November 25, the TALF has extended $3.8 billion in loans since its launch on May 20,
2020. Loans have been collateralized by SBA-guaranteed ABS, commercial mortgage-backed
securities (CMBS), and ABS secured by insurance premium finance loans or student loans.
The announcement and presence of the TALF has substantially helped improve liquidity in the
ABS markets, including those for CMBS and collateralized loan obligations, with spreads in some
ABS sectors returning close to normal levels. The TALF interest rates are attractive to borrowers
when market conditions are stressed but not under normal conditions. While the facility is
authorized to extend up to $100 billion in loans, total take-up will likely be much less unless ABS
market conditions worsen.