Fed’s Main Street Lending Program Off to Slow Start
In case you missed it, the Fed’s $600 billion midsize business initiative, the Main Street Lending Program kicked off last week. Yeah, that’s right. It’s a $600 billion program that you have probably never heard of. Remember when $600 billion was a big number?
Unsurprisingly, the program is off to a slow start. After months of administrative headaches, its launch was met with lackluster participation from the nation’s largest banks, and a seemingly low level of borrower interest. Targeting mid-size businesses, with a minimum loan size of $250,000, loans made through the Main Street program are a different animal compared to PPP loans.
First, they eventually have be repaid in full by borrowers. Weird, right? Loans that have to be repaid? And secondly, banks must retain some (5%) of the loans they originate through the program on their balance sheets.
Some banks were spooked by the large paperwork requirements, some big companies have better options for securing credit, and even if there is a large pent-up demand, it will take time for the program to ramp up. Nevertheless, it is worth watching how this initiative develops over the coming months.
Earlier this year, Fed Chairman Jerome Powell was not joking around when he said the Fed was prepared to “use its full range of tools”. It cut rates to the effective lower bound. It signaled that they would likely stay there through 2022. It nearly doubled the size of its balance sheet in the span of 6 months. And, it was even able to engineer some new tools that no one put into its tool box (cough - like buying corporate bonds – cough).
So, what’s next?
Monthly purchases to the tune of $80 billion worth of Treasury and $40 billion of Mortgage Backed Securities were announced a few weeks ago. They don’t seem to be going anywhere soon. And yield curve control, or explicitly targeting interest rates across the Treasury term structure, is the new talk of the town.
Nevertheless, with short term rates at zero and credit markets functioning, Congress is in the driver seat to tackle the crisis’s most persistent issue: unemployment.
As my colleague Tom Block mentioned, the Senate returns from holiday later this month and will respond to the House’s $3 trillion Phase 4 stimulus package bill. While Senate leadership originally said the bill was “not going anywhere”, the recent uptick in new COVID-19 infections is pointing towards a large bill coming together at the end of July or first week of August.
The yield on the benchmark 10-year U.S. Treasury is 0.64% down from 0.67% last week. Next FOMC meeting on July 28-29.
