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US Fed moves to backstop firms' funding

Howard Schneider and Lindsay Dunsmuir
The US central bank has moved to ensure companies can continue paying workers and buying supplies

The US Federal Reserve has acted to ensure companies can continue paying workers and buying supplies through the coronavirus epidemic, restarting a program it used to backstop a key financial market during the 2007 to 2009 crisis.

As the Fed and other US officials continued fine-tuning their crisis response and debating further steps to support the economy, the central bank said it would reopen the so-called Commercial Paper Funding Facility to underwrite the short-term loans that companies often use to pay for their operations .

While highly technical, the program was a critical piece of the Fed's response to the financial crisis a decade ago, at its peak in January 2009 providing $US350 billion ($A581 billion) to firms from banks and insurance companies to the financing arms of car makers and other manufacturers.

Stress in the market in recent weeks raised worries that the intensifying efforts made to slow the spread of the virus could leave companies stranded without cash flow or an easy and cheap way to borrow - forcing them towards lay offs or worse.

Debates about other facilities were ongoing, and US elected officials were contemplating hundreds of billions of dollars of relief in the form of cheques mailed to every household.

Stocks by midday held onto gains of about 3.0 per cent following a dramatic sell-off over the past week.

The Fed's action today "is a smart move...The advantage now is we can stop conditions from getting worse," in important funding markets, said Gregory Faranello, head of US rates at Amerivet Securities in New York.

To truly buffer against trouble to come, however, may require more aggressive steps if the estimated 35 million people in the restaurant, entertainment and related industries start to get laid off in large numbers, said David Kelly, chief global strategist at JPMorgan Asset Management.

"The question is are authorities doing all that they can to soften the blow of the social distancing recession?," Kelly said.

"I don't think we're there yet...There's going to be a lot of human misery out there."

The Fed at least felt its moves today could keep corporate cash flow troubles from deepening into problems of solvency.

"An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak," the Fed said in a statement issued on Tuesday morning.