Fed Bets Trillions In SMB Lending That Consumers Will Return

A quick recovery may be in the cards.

But so might a “false start.”

Thursday morning, the U.S. Federal Reserve said that it had launched a multi-trillion dollar lending program that targets smaller businesses, and in a broadened salvo, targets local governments, too.

It’s all meant to shore up the U.S. economy, as the fallout from the coronavirus continues.

The $2.3 trillion lending program, in part, supplies financing to banks that are participating in efforts to get funding to small businesses as part of the Small Business Administration’s Paycheck Protection Program.

As reported, the Fed is expanding its “Main Street” lending efforts for smaller firms that have staff up to 10,000 individuals; the expanded Main Street focus will provide an added $600 billion in loans and offers $75 billion slated to come from the Treasury Department.

The Fed package, of course, comes on the heels of the $2.2 trillion stimulus package, which among other things, contains checks for individual taxpayers and $349 billion in loans for the smallest businesses that are the staples of Main Street.

Additionally, the Fed is debuting a Municipal Liquidity Facility that will give states and local governments with as much as $500 billion in loans through the purchase of muni bonds.

Federal Reserve Chairman Jerome Powell said during remarks Thursday to the Brookings Institution that “there is every reason to believe that the economic rebound when it comes, can be robust.”  But he also said, in a nod toward reopening the U.S. economy, that “we want to avoid a false start” tied to a partial reopening and a new spike in coronavirus cases.

The urgency is there, as through the past three weeks roughly 17 million Americans filed for unemployment.

The Fed program is focused on lending.

However, the question is, how will the spending materialize?  In previous bids to get money circulating through the economy, in what seems like a lifetime ago, the Federal Reserve slashed interest rates to roughly zero in a bid to stimulate activity.

Different This Time?

This recession is different than previous ones on several levels. A global health crisis has frozen and transformed daily life across any avenue you might care to name — we don’t work from where we used to (now it’s done at home), or interact the way we used to (now we use Zoom and other video chat rooms more than ever) and the businesses with which we transact are largely shuttered.

The joint and separate actions of the Fed, Congress and the Treasury Department seek to use monetary and fiscal policy to ease credit crunches, which can and have been exacerbating the effects of the coronavirus. Direct payments to consumers can help. But then again, so much of the rescue plan is tied to simply covering mounting expenses, the ripple effects of revenue that has stopped coming to businesses and paychecks that have stopped coming to individuals.

Prodding consumers to spend, to get to that state of robust economic recovery eyed by the Fed (via chairman in his remarks Thursday) may be a tougher road.

The New York Fed, after all, said this week that a March survey of consumers found increasing worries over job losses and debt.

Looking forward at household spending growth expectations for one year ahead, the February reading was 3.10 versus 1.14 in March. And in the latest survey taken by the Fed in the last week of March, the expectations were revised sharply downward to 66 basis points.

“We find greater concern about future access to credit and an increase in the average likelihood of missing a debt payment over the next three months,” said the New York Fed. The mean probability of not being able to make minimum debt payments three months from now rose from 11.3 percent to 15 percent.

The pullback in spending is illuminated in part by the fact that 58 percent of respondents said they have half as much in savings as they will need to meet expenses if savings are their only source of cash. As many as 55 percent of Americans have two weeks or less of cash available to pay bills before having to draw down on savings.

And in PYMNTS research this week, six out of 10 U.S. consumers now report living paycheck-to-paycheck, and almost half have less than $2,500 in savings.

It stands to reason that individuals and families will seek, in the absence of steady cash flow — or beset by worries that, as the economy does rebound, the foundation may be shaky — to pull back on spending. And in that scenario, the hundreds of billions of dollars in lending may not be enough for us to truly emerge from the economic devastation of COVID-19.