"The U.S. economy was in the midst of the longest post-war economic expansion, with historically low levels of unemployment, prior to the onset of the COVID-19 pandemic earlier this year. The global pandemic not only brought about a public health crisis but also caused a contraction of economic activity at an unprecedented pace. Initially, the pandemic reduced consumer spending, slowed manufacturing production, and led to widespread business closures. The unemployment rate surged from 3.5 percent in February to a record high of nearly 15 percent in April. Since then, extraordinary measures undertaken by policymakers have succeeded in arresting the decline in economic conditions, initiating a recovery and lowering the unemployment rate to 7.9 percent as of September. However, a protracted virus outbreak poses downside risks that can slow the recovery and even prolong the economic downturn."

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"With cash flows impaired due to the COVID-19 pandemic, many businesses may be challenged to service their debt. Since March, nearly $2 trillion in nonfinancial corporate debt has been downgraded, and default rates on leveraged loans and corporate bonds have increased considerably. The growing number of bankruptcy filings could stress resources at courts and make it harder for firms to obtain critical debtor-in-possession financing. It could also prevent many firms from restructuring their debt in a timely fashion, potentially forcing them into liquidation."

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"Money market funds (MMFs) offer shareholders redemptions on a daily basis while holding many short-term assets that are less liquid, especially in times of stress. Stresses on prime and tax-exempt money funds in March revealed continued structural vulnerabilities, which led to increased redemptions and, in turn, likely contributed to the stress in STFMs. Among institutional and retail prime MMFs, outflows as a percentage of fund assets exceeded that of the September 2008 crisis. Outflows abated after the Federal Reserve announced support for the CP market and MMFs."

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