llustration: Aïda Amer/Axios
In less than a month, the Federal Reserve has unleashed a multi-trillion dollar tour de force to buoy the U.S. economy against the COVID-19 pandemic.
Why it matters: While it has steadied the markets, the Fed is poorly equipped to offset the hit being absorbed by small business owners and the close to 17 million Americans who have filed for unemployment in just the past three weeks.
Driving the news: The S&P 500 rose by nearly 1.5% on Thursday, capping its best holiday-shortened week since 1974 (the markets are closed today for Good Friday). Meanwhile, the Fed unfurled its latest rescue plan, designed to deliver $2.3 trillion to cash-strapped cities, states and mid-sized businesses.
- "The Fed is proactively making decisions versus reacting to a selloff," Richard Steinberg, chief market strategist at The Colony Group, tells Axios.
- "They are saying, 'We are in front of this, and we are using the full force of what we need to make sure money gets to corporations large and small to help get through this."
By comparison, during the economic disaster of 2008, the central bank took more than a year to bring rates to zero and began its bond buying program at $700 billion — a full 11 months after a recession had started.
- Per the WSJ: "In leading the Fed beyond past efforts to support lending during the Great Depression or after the 2008 financial crisis, Chairman Jerome Powell is pushing deeper into areas of credit and fiscal policy that the central bank has traditionally deferred to elected officials."
The big picture: In the places where the Fed has stepped in to provide funding — such as mortgages, municipal bonds and investment-grade corporate debt — order has been restored and markets have bounced.
- In Thursday's announcement, the central bank expanded its reach, saying it would buy some junk bonds.
Between the lines: Because the Federal Reserve is the agency closest to the financial system, Congress asked it to deliver much of the funding promised to businesses in the $2 trillion CARES Act, Peter Ireland, an economics professor at Boston College, tells Axios.
- The Fed also can deliver much more bang for the buck by taking on leverage and lending out 10 times the amount allotted in the bill to spread that money to various companies.
- But the central bank has no mechanism for getting money to the businesses directly, so it needs to use lenders as an intermediary.
Be smart: Even with the Fed supercharging the $350 billion Paycheck Protection Program (PPP) initiative meant to help small businesses, many of the firms most in need will miss out.
- The program has been a debacle for desperate business owners — demand has far outstripped supply, and banks have been largely unable or unwilling to process loan requests or distribute the funds.
- And the Fed's new facility will target businesses with up to $2.5 billion in annual revenue, leaving many smaller firms playing catch-up.
"Businesses that don’t have a money manager, don’t have an attorney at their disposal — those people are not going to be helped by the Fed," says Amanda Fischer, policy director for the Washington Center for Equitable Growth.
- "The most sophisticated businesses are the best positioned to get the PPP loans and are probably going to snatch them up and the money will be gone."
The last word: "Ultimately the Fed doesn’t have the infrastructure to touch Main Street," Vincent Reinhart, chief economist at Mellon who spent 24 years at the Fed, tells Axios.
- "The Fed touches Main Street by encouraging banks to lend. But ultimately the banks have to lend."