MNI EXCLUSIVE: Fed Likely To Re-Up Covid Lending Facilities

--Fed Set To Extend Programs Past Late Sept. End Date

--Some Programs, Including Main Street, Likely To Be Adjusted

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve will likely extend its emergency

programs to backstop companies and markets past their set end date of late

September, former Fed officials told MNI, citing persistent concerns over the

path of Covid-19 and the small cost of keeping these facilities open.

     Some of the 11 lending facilities will likely be adjusted if usage

continues to be low, particularly the Main Street program for small and midsize

businesses and the Municipal Liquidity Facility, the ex-officials said. Main

Street has yet to disburse any money while only one state has tapped the latter

program since it became operational a month ago.

     An extension of the lending facilities should reassure investors that

smooth market functioning will be sustained as the strength of the recovery

rises and falls with coronavirus infection numbers, sources said.

     "The economy won't have recovered by the fall, and so there will still be a

need to support access to credit," William English, former director of the

division of monetary affairs at the Fed, told MNI.

     "There isn't really a need to close the programs down while the uncertainty

around the virus and the economic outlook remains high."

     Nathan Sheets, former international finance division director at the Fed

Board said the programs could be extended at least another six months. "A

September expiration is pretty close. They are going to want the insurance

around a little longer."

     --LOW USAGE

     Usage of the 11 so-called "Section 13(3)" facilities has totaled roughly

USD100 billion thus far, a tiny fraction of the USD2.6 trillion of lending the

Fed said it would provide to companies and funds under "unusual and exigent

circumstances."

     The last of them, the Primary Market Corporate Credit Facilities, was

brought online Monday but the Fed said it has yet to be approached by any

interested issuer. That usage is low is seen by the Fed as a positive sign that

its presence has restored confidence and enabled private parties to continue

transacting.

     But in a Brookings Institution paper this month English argued the terms of

the Main Street program are too unattractive to borrowers. He reckons the

program is likely to see changes. "I think take-up on the program is likely to

be pretty modest, and the Fed and Treasury may well make some changes to try to

encourage use."

     Fed Chair Jerome Powell on Tuesday told lawmakers he would consider

lowering the minimum loan threshold from USD250,000.

     -- TEMPORARY FX SWAPS

     The Fed is also likely to extend the nine temporary dollar swap

arrangements that are in place with central banks from Australia, Brazil,

Denmark, South Korea, Mexico, New Zealand, Norway, Singapore and Sweden, the

former officials said.

     Though the use of standing and temporary swap lines has declined from highs

of USD450 billion to about USD275 billion, the "amount remains high," English

said, and "they serve as a useful backstop. I don't see much reason to close

them down in a hurry."

     "September is not very far off. I don't think we are going to get any

decisive information on the economy in the next three months to move away from

those facilities," former Minneapolis Fed President Gary Stern told MNI.

     "It is virtually costless to continue to make them available."

     A joint decision by the Fed and the Treasury is required to extend the

programs, nine of which are set to be terminated in late September. The

municipal facility is set to stop lending in December and the commercial paper

funding facility ceases operation in March.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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