Fed Announces Two Facilities To Support Credit Markets Amid Pandemic

The Federal Reserve Board announced Tuesday that it will establish two “facilities” to support the flow of credit to people and businesses during the turmoil caused by the coronavirus pandemic.

The Fed is establishing a Commercial Paper Funding Facility (CPFF) and a Primary Dealer Credit Facility (PDCF), both designed to ensure credit is available to Americans.

The Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury’s Exchange Stabilization Fund. 

“By providing short-term credit, the CPFF will help American businesses manage their finances through this challenging period,” U.S. Treasury Secretary Steven T. Mnuchin said. “The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.”

Reducing Risk

The Fed said the commercial paper market has been under “considerable strain” during the coronavirus pandemic. Commercial paper markets finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies. 

“By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market,” the Fed said. “An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.”

The PDCF, the Fed said, will offer overnight and term funding with maturities up to 90 days and will be available on Friday. Additional details include:

  • It will be in place for at least six months and may be extended as conditions warrant.
  • Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities.
  • The interest rate charged will be the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Read more from the Fed here.