Fed regional chief: loan program could help slow recovery

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WASHINGTON (AP) – The chairman of a regional Federal Reserve bank that will oversee a revolutionary business lending program said on Wednesday he believed a slower-than-expected recovery from the economic downturn would lead companies to seek a essential program support.

In an interview with The Associated Press, Eric Rosengren, chairman of the Federal Reserve Bank of Boston, said the new Main Street loan program will provide bridging loans to once-healthy businesses struggling with the virus. and the resulting business closures and economic downturn. . The Main Street program, announced in March, is expected to start operating by June 1.

The program will act as “an insurance policy in case things don’t go as well as we hope in the second half of the year,” Rosengren said. Businesses that are still suffering from low demand or a possible second wave of coronavirus may not be able to borrow later this year as many banks may be struggling with failed loans. This deficit would likely stimulate demand for the Fed’s Main Street program, Rosengren said.

“I think a lot of companies are realizing now… that this may be a much longer and slower ramp-up than they expected,” Rosengren said. “Businesses may not need the funds immediately. But if the recovery were to be slow enough, they might find, as summer approaches, that they need more funds and that the facility will become very useful. ”

The Main Street Lending program marks the first time since the Great Depression that the Fed will lend directly to companies outside of banking. Most of the other emergency programs he launched this year are intended to benefit the economy by keeping the financial system functioning.

Despite its name, the Main Street program is for businesses too large for the government’s small business loan effort, known as the Paycheck Protection Program. The Fed has announced that it will lend up to $ 600 billion under this program.

Businesses with up to 15,000 employees or $ 5 billion in revenue will be eligible for loans. The minimum loan will be $ 500,000, more than double the amount of loans granted by the PPP.

In an online speech to a group of companies on Tuesday, Rosengren suggested that the U.S. economy will continue to struggle long after states and cities lift restrictions on doing business. Without a vaccine or other effective public health measures, he said, many consumers, especially the elderly, will continue to avoid shopping, dining out or traveling. Since one-fifth of jobs in the United States are in the restaurant, retail and hospitality industries, a full recovery will only be possible when people feel more confident, Rosengren said.

“While allowing employers to reopen will allow some people to return to work, it is not a panacea for our economic challenges, which are once again rooted in public health concerns,” the head of the department said on Tuesday. Fed.

In the interview, Rosengren said the Fed is willing to take risks with the Main Street program and is willing to lose money. This echoes a reversal on Tuesday by Treasury Secretary Steven Mnuchin, who said the Treasury would accept the losses of the $ 75 billion it is providing the Fed to fund the Main Street program. Mnuchin had previously said the Treasury expected to be fully paid back.

“These loans are going to carry some risk, and therefore some of these loans will not be fully fruitful, and that is exactly why we have the backing of the Treasury,” Rosengren said. “It is about making relatively risky loans, in the hope of obtaining better economic results.”

Rosengren said the program is intended to “respond to a niche”.

“It’s not for borrowers who have no problem; it’s not for borrowers who have serious problems, ”he said. “It’s with borrowers who have a temporary termination but fully expect to recover over time. “

The loans will be made by the banks, which will assess the borrowers and decide whether to grant a loan. The Fed will then buy 85-95% of the loan from the bank, with the rest remaining on the banks’ books, ensuring that they keep a share of the success of the loans.

The terms of four-year loans are relatively generous: a business can defer payments for up to one year, and the interest rate is relatively low. As an incentive, banks will receive commissions on loans.

Rosengren said he believed companies in most industries would apply, although he noted he was surprised by the interest expressed by manufacturing companies. Many of them apparently suffered greater loss of income than expected.

If it turns out that there is little demand for the Main Street program, Rosengren said, “this is good news” because it suggests the economy is recovering.

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