The American commercial paper market is functional and healthy again, according to the head of the Federal Reserve.
Jerome Powell is the Chair of the Federal Reserve and he testified earlier this week along with Steve Mnuchin, the US Secretary of the Treasury, in front of the House Financial Services Committee.
The two testified about their response to the financial and economic crisis created due to COVID 19.
Frank Lucas is a Republican Congressman from the State of Oklahoma and a member of the committee.
During his turn to ask questions, he asked Powell about the state of the commercial paper market. The Federal Reserve established the Commercial Paper Funding Facility on March 17, 2020, after COVID 19 ripped the commercial paper market.
“The Federal Reserve Board established a Commercial Paper Funding Facility (CPFF) on March 17, 2020, to support the flow of credit to households and businesses.” The Fed states on its website. “Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies.”
“Commercial paper finances a wide array of economic activity and provides liquidity for companies to meet their operational needs. With the commercial paper market under significant strain due to COVID 19 in mid-March, the Federal Reserve established the Commercial Paper Funding Facility to encourage investors to lend in the commercial paper market which ultimately supports businesses, jobs across the country.” Representative Lucas stated in setting up his question. “Chairman Powell, could you describe the current indicators to how the commercial paper market responded to the creation of the facility.” In his response, Powell stated, “The commercial paper facility has substantially healed. As you point out, it really closed there in the beginning part of March as so many markets did. When we announced the facility, u know, the highest grade of borrowers were able to start borrowing again. So, largely, but not completely, the Fed market has returned to fairly normal function.” Commercial paper, “is an unsecured form of promissory note that pays a fixed rate of interest. It is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project,” according to the website, Investopedia.
The creation of the facility was one of several steps taken by the fed to shore up the economy in the aftermath of COVID 19. Powell noted in his written remarks, “In addition to these steps, we took forceful measures in four areas: open market operations to restore market functioning; actions to improve liquidity conditions in short-term funding markets; programs, in coordination with the Treasury Department, to facilitate more directly the flow of credit to households, businesses, and state and local governments; and measures to encourage banks to use their substantial capital and liquidity buffers built up over the past decade to support the economy during this difficult time.”
