Fed makes last-minute changes to ‘Main Street’ programme

The Federal Reserve has made some last-minute adjustments to its ‘Main Street’ lending programme, which the central bank intended to have already launched by now. 

The Fed has both reduced the minimum loan size and raised the maximum loan size. It also lengthened the term of loans and delayed the period before firms have to start meeting principal payments.

To reduce the risks for banks, the Fed will also now purchase 95% of each loan from banks instead of 85%.

The moves should make the programme more favourable to a wider set of companies and the banks who are underwriting the loans. It is the second time the Fed has chosen to adjust the terms since announcing its plans in March.

The Fed offered no specific date for when the programme will be launched but said it will be open for registration “soon”. The central bank had previously planned to have started lending by the end of May, Fed chair Jerome Powell told lawmakers on May 19.

He has suggested on multiple occasions that designing the programme has been a significant undertaking. “It is far and away the biggest challenge of any of the 11 facilities that we’ve set up,” Powell said in a May 29 webcast.

The Fed had also planned to have already launched the Primary Market Corporate Credit Facility by the end of May, but such an announcement has not yet been made.

The US economy officially entered into a recession in February, the National Bureau of Economic Research (NBER) announced on June 8. February marks the end of a 128-month expansion, the longest since NBER records began in 1854.

The NBER typically waits for a decline in activity that lasts a few months before declaring a recession, but judged the “unprecedented magnitude” of the decline in activity warrants the designation. “Even if it turns out to be briefer than earlier contractions,” the NBER added.

More favourable

Under the new guidelines, companies will be able to borrow a minimum of $250,000, half that in the previous plans.

The maximum loan will vary among the three facilities in the programme, but banks can now refinance loans up to $300 million, up from $200 million previously. New loans are capped at $35 million, up from $25 million.

The programme includes a “new loan facility”, an “expanded loan facility” and now an additional “priority loan facility”. While all serving different purposes, these facilities will lend to a single special-purpose vehicle to purchase up to $600 billion in business loans.

Businesses now also have five years to repay the loans, instead of four. They will not have to pay anything back for two years, up from a year previously.

“Supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery,” Powell said.

But the facility can only do so much, he has said previously. “We’ll be a big help for companies for a while, but over a long period of time it may be that more fiscal help is needed,” he said during a May 13 Peterson Institute for International Economic webcast.