Fed Details $2.3T In Stimulus, Including Riskier Debt Purchases

The SPDR S&P 500 ETF Trust SPY gained 1.4% Thursday morning after the Federal Reserve announced new details on up to $2.3 trillion in programs to support the economy.

The primary goal of the programs is to provide necessary liquidity to small and midsize businesses and state and local governments suffering due to the COVID-19 economic shutdown.

Expanded Fed Stimulus

The Fed said its Main Street business lending program will target businesses with less than 10,000 employees and $2.5 billion in 2019 revenue.

Principal and interest payments for these loans will be deferred for one year. The loan amounts would range from a minimum of $1 million to a maximum of either $25 million or an amount that “when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization,” whichever is less.

Interest rates on the loans will be the rate on the Fed’s Secure Overnight Financing Rate (0.01%) plus a rate in the range of 2.5% to 4%, with a four-year maturity.

The Fed also said it will be accepting new, riskier debt classes in its Term Asset-Backed Securities Lending Facility, or TALF.

The Fed has approved purchases of AAA-rated tranches of existing commercial mortgage-backed securities and newly issued collateralized debt obligations.

The Fed also said it will be backing certain riskier corporate debt, including new debt issuance by so-called “fallen angels.”

Fallen angels are companies that had investment-grade debt in mid-March but have since been downgraded to non-investment-grade BB credit ratings.

The Fed also said it would purchase up to $500 billion in short-term debt directly from state governments, U.S. counties with at least 2 million residents and U.S. cities with at least 1 million residents.

Powell Optimistic

Stock prices soared on Thursday following optimistic words from Fed Chair Jerome Powell in a webinar from The Brookings Institution following the new policy announcements.

“When the spread of the virus is under control, businesses will reopen and people will come back to work. There is every reason to believe that the economic rebound, when it comes, can be robust,” Powell said.

Benzinga’s Take

It seems increasingly likely that the COVID-19 recession will merely be temporary in nature. The $1-million question for investors is how long will it take for the economy to recover — and will it be able to recover fully following such a large shock?

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

FOMC Minutes: Economic Projections 'Downgraded Significantly' Due To COVID-19

How To Make Sure You Get The Largest Possible COVID-19 Stimulus Check

Public domain photo via Wikimedia.