Economist: Federal Reserve A Last Resort Lender For Small Businesses
One in four small businesses is closed in the United States right now, according to the U.S. Chamber of Commerce. A historic number of Americans are also unemployed due to the spread of the COVID-19 pandemic. In response, the Federal Reserve has opened two facilities — a Primary Dealer Credit Facility and a Commercial Paper Funding Facility — that will “support the flow of credit to households and businesses.”
Through all of this, the federal reserve is acting as a sort of "lender of last resort" right now, instead of using more conventional responses like cutting interest rates, which doesn't impact consumption and investment as much, says Kathy Zhang, an economist and associate professor in the Krannert School of Management at Purdue University, in a press briefing.
Zhang is an expert in monetary policy and its effect on small business financing.
"So they’ve been resorting to alternative measures to respond to the credit needs of small businesses, which have been disproportionately affected by the pandemic and need lending the most to sustain their operations," says Zhang. "Because businesses with 500 employees or fewer make up over 99 of all businesses and more than half of the labor force in the United States, policies designed to help provide credit for small businesses are essential to avoiding a prolonged recession.”
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