COVID-19

Lapse in Fed lending programs could cost companies hurt by COVID

David Brancaccio, Nancy Marshall-Genzer, and Alex Schroeder Nov 23, 2020
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Treasury Secretary Steven Mnuchin and Chairman of the Federal Reserve Jerome Powell testify during the Senate's Committee on Banking, Housing, and Urban Affairs hearing examining the quarterly CARES Act report to Congress on Sept. 24, 2020, in Washington. Drew Angerer/Pool/AFP via Getty Images
COVID-19

Lapse in Fed lending programs could cost companies hurt by COVID

David Brancaccio, Nancy Marshall-Genzer, and Alex Schroeder Nov 23, 2020
Heard on:
Treasury Secretary Steven Mnuchin and Chairman of the Federal Reserve Jerome Powell testify during the Senate's Committee on Banking, Housing, and Urban Affairs hearing examining the quarterly CARES Act report to Congress on Sept. 24, 2020, in Washington. Drew Angerer/Pool/AFP via Getty Images
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Markets are still gauging the effects of the dispute that flared last week, the Treasury Department versus the Federal Reserve. Treasury Secretary Steven Mnuchin told the Fed he won’t allow several pandemic lending programs to keeping going.

Marketplace’s Nancy Marshall-Genzer has been looking at what this means for companies selling corporate bonds to the Fed. The following is an edited transcript of her conversation with “Marketplace Morning Report” host David Brancaccio.

David Brancaccio: Nancy, we know this Fed lending served as an almost psychological backstop for credit markets. What might happen if some backstops go away?

Nancy Marshall-Genzer: The Fed was buying corporate bonds directly from companies. After that goes away, businesses will probably have to pay more to get investors to buy their corporate bonds, and this includes firms that were hit hard by the pandemic, which private investors might be avoiding. Companies like airlines, but also the service sector — restaurants and hotels.

Brancaccio: So, what happens if those firms can’t sell bonds to the central bank anymore?

Marshall-Genzer: They’ll have to rely more on private investors. I asked Matthew Mish about this. He’s head of credit strategy at UBS. He says average companies could end up paying investors buying their bonds about half a percentage point more in interest. That’s not such a big deal. But Mish says those companies that are really hurt by the pandemic could end up paying more than that.

Matthew Mish: In certain cases it may be enough to put companies at least in a position, not necessarily of financial distress, but it certainly has real world effects if that company has financing costs go up more than a half point.

Marshall-Genzer: Mish says some of these companies might have to pay investors 8% to 10% to buy their bonds, a full percentage point more than they were paying.

Brancaccio: And what’s that do to their bottom lines?

Marshall-Genzer: Mish said it could mean they don’t make new investments or hire new employees.

COVID-19 Economy FAQs

Millions of Americans are unemployed, but businesses say they are having trouble hiring. Why?

This economic crisis is unusual compared to traditional recessions, according to Daniel Zhao, senior economist with Glassdoor. “Many workers are still sitting out of the labor force because of health concerns or child care needs, and that makes it tough to find workers regardless of what you’re doing with wages or benefits,” Zhao said. “An extra dollar an hour isn’t going to make a cashier with preexisting conditions feel that it’s safe to return to work.” This can be seen in the restaurant industry: Some workers have quit or are reluctant to apply because of COVID-19 concerns, low pay, meager benefits and the stress that comes with a fast-paced, demanding job. Restaurants have been willing to offer signing bonuses and temporary wage increases. One McDonald’s is even paying people $50 just to interview.

Could waiving patents increase the global supply of COVID-19 vaccines?

India and South Africa have introduced a proposal to temporarily suspend patents on COVID-19 vaccines. Backers of the plan say it would increase the supply of vaccines around the world by allowing more countries to produce them. Skeptics say it’s not that simple. There’s now enough supply in the U.S that any adult who wants a shot should be able to get one soon. That reality is years away for most other countries. More than 100 countries have backed the proposal to temporarily waive COVID-19 vaccine patents. The U.S isn’t one of them, but the White House has said it’s considering the idea.

Can businesses deny you entry if you don’t have a vaccine passport?

As more Americans get vaccinated against COVID-19 and the economy continues reopening, some businesses are requiring proof of vaccination to enter their premises. The concept of a vaccine passport has raised ethical questions about data privacy and potential discrimination against the unvaccinated. However, legal experts say businesses have the right to deny entrance to those who can’t show proof.

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