By Nick Timiraos 

The Federal Reserve went farther than ever before to shore up the U.S. economy by unveiling programs to lend directly to state, cities and midsize businesses that have seen revenues evaporate amid efforts to combat the novel coronavirus.

The central bank also said it would expand previously announced plans to backstop lending to large companies by supporting riskier bonds issued by companies that had recently lost their investment-grade status.

Altogether, the Fed said nine lending programs that it is creating or expanding would provide as much as $2.3 trillion in loans, and officials signaled they were prepared to expand those programs as needed to stem long-lasting damage to the U.S. economy.

"It's really an awesome display of creativity and decisiveness -- the breadth and diversity of programs," said Antonio Weiss, a Treasury official in the Obama administration who is now a senior fellow at Harvard's Kennedy School of Government. "They are taking a role well beyond any the Fed has played in its modern history, and the economy needs it."

In leading the Fed past its efforts to support lending during the Great Depression or after the 2008 financial crisis, Fed Chairman Jerome Powell is pushing deeper into areas of credit and fiscal policy the central bank has traditionally left deferred to elected officials.

During and after the 2008 crisis, the Fed left it to the White House and Congress to provide financial assistance to failing auto makers and local governments facing declining revenues and rising expenses, viewing such decisions as essentially political.

Now, with a far broader swath of the economy shut down to prevent the spread of infection, companies and local governments of all sizes are struggling to make payroll, pay bills and service their debts. This time, the Fed has signaled a willingness to buy assets or make loans in any market it thinks will be necessary to stave off further job losses and business failures.

The Fed has tried to identify "the priority areas where we thought help was needed," said Chairman Powell during an online forum Thursday. "As we identify other areas, we won't hesitate to move."

The Fed first fired its arsenal at funding markets last month to prevent a public-health crisis from morphing into a financial crisis, and it later said it would throw another volley at credit markets that have broken down. On Thursday, the Fed introduced a new generation of lending programs to prevent a liquidity crunch from turning into a solvency crisis for American businesses, states and cities.

Congress made the latest rearming of those stockpiles possible last month when it gave the Treasury Department more than $450 billion to cover losses the Fed might sustain in its lending programs. The Fed relied on $185 billion in additional support from the Treasury in launching the programs announced Thursday.

That leaves the Fed with a significant amount of resources available still to expand these programs or introduce new ones should they be needed. "For credit policy, the Fed still has plenty of bullets left," said JPMorgan Chase economist Michael Feroli.

The steps unveiled Thursday will finance loans that banks make through the government's emergency small-business lending program and allow banks to exclude those loans from required capital ratios, freeing them up to make more of those loans, which are separately guaranteed by the Small Business Administration.

The Fed will create two facilities to encourage banks to lend to midsize businesses, which it defined as those with fewer than 10,000 employees or less than $2.5 billion in revenues last year. This Main Street Lending Program will enable as much as $600 billion in lending to firms that are too large to qualify for the small-business loans but too small to access corporate debt markets.

The central bank announced it would backstop some pieces of riskier corporate debt in two previously established facilities, and the Treasury increased to $75 billion from $20 billion the amount of money available to cover losses the Fed might sustain as a result.

One corporate credit backstop to support new debt issuance of highly rated firms will be expanded to include so-called fallen angels that were investment-grade in mid-March but have subsequently been downgraded one notch, from triple-B to double-B. A second corporate credit backstop will allow a limited amount of purchases of noninvestment-grade debt in exchange-traded funds.

Another program will allow new classes of debt in the previously announced Term Asset-Backed Securities Loan Facility, or TALF, that were excluded from that facility when it was used after the 2008 financial crisis to support consumer and business credit markets.

The Fed will now accept triple-A-rated tranches of existing commercial mortgage-backed securities and newly issued collateralized loan obligations. Under TALF, the Fed lends money to investors to buy securities backed by credit-card loans and other consumer debt. The Fed has made $100 billion available for that program and didn't increase the amount Thursday.

To ease funding strains for cities and states seeing large revenue drops and rising expenses from simultaneous economic and health crises, the Fed said it would purchase as much as $500 billion in short-term debt directly from U.S. states, the District of Columbia, U.S. counties with at least two million residents, and U.S. cities with at least one million residents.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

April 09, 2020 16:03 ET (20:03 GMT)