The US stock market is like a roller coaster.
As the close of today’s trading, the Dow jumped 5.20% to 21,237.79. The S&P 500 climbed 6% to 2,529.19 and the Nasdaq Composite advanced 6.23% to 7,334.78. Stocks recovered after the Trump administration releasing a fiscal stimulus package of more than $1 trillion.
The stimulus package includes direct payments to Americans, mainly via CPFF. CPFF stands for Commercial Paper Funding Facility, which had been used during the 2008 financial crisis.
In order to understand CFPP, the first thing is to understand CF, the commercial paper. Commercial paper can be recognized as a short-term IOU. If you buy commercial paper, it means that you lend some money to the company.
How does CPFF work?
- Fed opens a Special Purpose Vehicle (SPV), you can see it as a shell company.
- Treasury used $1 trillion money in Exchange Stabilization Fund (ESF) as principal for SPV
- SPV buys CP in the market.
- With these CPs, SPV can borrow money form the Fed and continue buying CPs from the market.
- Companies pay back the money so that they can get back CPs.
- SPV pay money back to the Fed.
In essence, this process is lending money directly to companies.
Some may wonder that the Fed already cut interest rates and implemented Quantitative Easing (QE), companies should have money by now. Why CPFF this time?
There’s a difference between QE and CPFF. Money will directly go to companies via CPFF while financial institutions get money via QE. Most companies would use the money from CPs to stock or pay wages to employees, which is good in the long run.
What’s the impact?
Though Treasury will only provide $10 billion at first, SPV later can mortgage CPs to the Fed and continue buying CPs.
The Treasury Secretary Steven Mnuchin later mentioned in the press conference that Treasury can afford more than $1 trillion CPs. By the way, the Fed bought $738 billion CPs during 2008 financial crisis.
In conclusion, the stocks reacted well after the stimulus plan. Will it stop the falling of stocks? It depends on the progress of coronavirus in the world. If situation gets better, investors will regain confidence which can boost the economy.