The Federal Reserve is extending the emergency lending facilities it set up to shore up financial markets during the pandemic until the end of the year, in the latest sign of its concern that the coronavirus crisis will continue to weigh on the US economy.

The board of the US central bank announced the decision on Tuesday as its monetary policymakers began a two-day meeting. The lending facilities, which were designed to support short-term funding and corporate debt markets and to offer loans to struggling midsized businesses, were due to expire at the end of September.

“The three-month extension will facilitate planning by potential facility participants and provide certainty that the facilities will continue to be available to help the economy recover from the Covid-19 pandemic,” the Fed said.

The facilities had “provided a critical backstop, stabilising and substantially improving market functioning and enhancing the flow of credit to households, businesses, and state and local governments,” it added.

Fed officials had signalled that the lending facilities would be in place as long as they were needed and would not be allowed to lapse prematurely.

July 22 Federal Reserve's alphabetti spaghetti

In an interview with the Financial Times this month, Eric Rosengren, the president of the Boston Fed, had said the Main Street Lending Programme, which he is overseeing and which had only recently become fully operational, would probably be extended as more businesses needed assistance to stay afloat. “I would think if there is a need — and my expectation is there probably will be a need — that that will be extended,” he said.

Usage of many of the 11 emergency facilities, which operate under powers allowing the central bank to make asset purchases in “unusual and exigent circumstances”, have remained modest since becoming operational over the past few months. The financial recovery engineered by the Fed since March has proved to be robust enough to enable companies and other market participants to access much-needed funding through private markets.

Wall Street strategists have since pared down their forecasts for the size of the Fed’s balance sheet by the end of the year to reflect this modest demand, even as they expected the central bank to maintain the facilities as backstops in the event that financial markets seize up once again.

An updated consensus of analyst forecasts compiled by the Financial Times showed that the balance sheet was expected to rise to $8.5tn by the end of 2020, roughly $1tn lower than the year-end level assumed in May.

Balance sheet forecasts (amended)

The Fed’s emergency lending programmes were set up with the consent of the Treasury department and using equity from the US government, which is bearing the brunt of the credit risk. Their extension was approved by Steven Mnuchin, the Treasury secretary.

“The extraordinary Federal Reserve response to the Covid-19 pandemic, supported by Treasury’s equity capital, has played a vital role in improving liquidity and restoring market function,” Mr Mnuchin said. “Through this extension, we will continue to support the flow of credit to American workers, businesses and municipalities.”


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