Washington acts to stem financial disruptions

Policymakers on Capitol Hill and in the Trump administration have taken several steps to soften the economic impact of the COVID-19 crisis, and are standing by to do even more.

Treasury Secretary Steven Mnuchin said March 19 that while he cannot predict where the market is headed, "what we are really focused on is providing liquidity to American businesses and to American workers."

The Federal Reserve Open Market Committee moved to blunt economic disruptions by slashing interest rates by a full percentage point March 15, lowering the target range for the federal funds rate to zero to 0.25%, and by setting a $700 billion target for purchases of U.S. Treasuries and mortgage-backed securities to help provide some liquidity.

Fed Chairman Jerome Powell said after the decision that the various measures being taken to protect people's health during the outbreak "will nonetheless understandably take a toll on economic activity in the near term," and that the Federal Reserve is "prepared to use our full range of tools to support the flow of credit to households and business, to help keep the economy strong, and to promote our maximum employment and price stability goals."

One of the tools deployed was the Federal Reserve Board's Commercial Paper Funding Facility to provide liquidity to the financial system, including short-term credit to businesses.

Hoping to avoid a run on money market mutual funds like that experienced during the 2008 global financial crisis, the Fed also said it would launch the Money Market Mutual Fund Liquidity Facility to make loans available to eligible financial institutions to help meet demand for redemptions during the crisis. Congress will have to give the Treasury Department permission to tap into the Exchange Stabilization Fund — a government cash reserve created to stabilize currency markets, to backstop the mutual funds — since it removed that authority after its controversial use during the 2008 crisis.

The request was part of a $1 trillion package the White House sent to Congress March 18 to blunt the impact of the crisis, including fears of rising unemployment.

The package includes up to $300 billion in loans for affected small businesses and $50 billion in loans to the airline industry, with some restrictions. Another $150 billion would be available for loans or guarantees to other "severely distressed" economic sectors impacted by the outbreak.

President Donald Trump supports an idea being floated by economic adviser Lawrence Kudlow that would give the federal government some equity in companies receiving the crisis-related funds, similar to arrangements made during the last economic crisis.

The $300 billion in business interruption loans would be available for employers with 500 or fewer employees to keep paying them for at least eight weeks, while firms that hire workers could have their loans forgiven, according to Mr. Mnuchin, who said smaller firms make up 40% of the workforce.

The administration's plan would send another $250 billion directly to American taxpayers starting April 6, with a second $250 billion round scheduled for May 18.

Senate leaders pledged to act quickly on the proposal, but some senators resisted the direct cash payments, while others pushed for tighter conditions on assistance to airlines and other corporations, including a ban on using it for stock buybacks or executive compensation. Mr. Trump called for the stock buyback ban at a White House briefing March 20. "I don't want to have stock buybacks. I don't like buybacks," he said.

Senate Majority Leader Mitch McConnell said that Republicans had reached an agreement late March 19 with many of the same features as the White House proposal, and would begin negotiating with Democrats. Senate Finance Committee Chairman Chuck Grassley, R-Iowa, said the Senate Republican proposal includes several tax relief efforts to help businesses and individuals impacted by the virus, including increasing the limit on interest deductibility and relaxing limitations on how companies use losses from previous years to offset current tax bills. It would also prevent federal loan money from being spent on executive compensation for at least two years.

Bipartisan support and 60 votes would be needed to pass a bill, which would then go to the House of Representatives. The House was in recess and members are waiting for the Senate to act before returning to Washington.

On March 18, the Senate voted 90-8 to approve an earlier package passed by the House March 14, and the president signed it that evening. The House measure calls for $104 billion to be spent on emergency paid leave, free coronavirus testing, expanded unemployment insurance and other assistance. It followed a $8.3 billion package enacted to help first responders and health officials deal with virus.

Several retirement industry trade groups are urging Congress to provide relief to employers with retirement plans and plan participants. In a collective March 20 letter to members of Congress, the 20 associations called for allowing penalty-free qualified distributions and loan modifications for people impacted by the pandemic; a temporary waiver for required minimum distribution rules; a freeze on defined benefit plan interest rates; and a pause on single-employer premiums to the Pension Benefit Guaranty Corp.