Fed announces launch of second facility to support credit markets
WASHINGTON — The Federal Reserve announced it is establishing a credit facility for primary dealers under its emergency powers, on the same day it exercised its authority to restart a liquidity backstop for commercial debt issuers.
The Primary Dealer Credit Facility “will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households," the Fed said in a press release release. The new facility will be available March 20, the Fed said.
The move is among a flurry of recent Fed actions intended to limit the economic impact of the coronavirus.
Treasury Secretary Steven Mnuchin said in a statement that he had sent Fed Chairman Jerome Powell a letter Tuesday approving the creation of the PDCF.
“The global coronavirus outbreak has contributed to significant financial market volatility,” said Mnuchin. “The establishment of a PDCF will help address illiquidity, mitigate disruptions in funding markets, support smooth market functioning and help facilitate the availability of credit to American workers and businesses.”
The PDCF will only be accessible to primary dealers of the Federal Reserve Bank of New York, and will provide loans for terms of up to 90 days. Loans made under the PDCF will be charged an interest rate equal to the primary credit rate at the New York Fed.
Borrowers will be able to pledge investment grade corporate debt securities, commercial paper, municipal securities, mortgage-backed securities and asset-backed securities. Also eligible is any collateral that can otherwise be pledged in open market operations.
The PDCF will be in place for six months, but could be extended, Mnuchin said in a stataement.
Earlier Tuesday, the Fed said it would establish the Commercial Paper Funding Facility to "support the flow of credit to households and businesses."
The CPFF will act as a liquidity backstop to U.S. issuers of commercial paper through a special-purpose vehicle that will purchase unsecured and asset-backed commercial paper from eligible companies, the Fed said. The facility was last activated during the financial crisis.