The balloon might pop’: Fed’s corporate intervention spurs anxiety
‘It’s going to collapse under its own weight’: The Fed’s far-reaching rescue triggers waves of worry
The Federal Reserve, which long came under withering attack from President Donald Trump for not doing enough to boost the economy, is now drawing fire for a massive rescue of U.S. corporations that’s driving up Trump’s favorite barometer of success: the stock market.
The Fed’s months-long effort to support hundreds of companies hammered by the coronavirus crisis is also propping up weak firms and subsidizing large ones like Apple and Amazon that don’t need help. As a result, critics say, it’s inflating stock prices, widening wealth inequality, delaying a wave of inevitable defaults, and directing investment into poorly run corporations at the expense of the long-term vitality of the economy.
“The Fed is increasingly in a lose-lose situation,” said Mohamed El-Erian, chief economic adviser at Allianz, the parent company of asset management giant PIMCO. “If it doesn’t follow through, it will undermine its credibility and effectiveness. But if it follows through, it will be spending money to support many companies that certainly don’t need it.”
The Fed first announced it would move to calm the corporate bond market in March by pledging to take sweeping measures to bolster the securities, when economic shockwaves from the pandemic sparked a panic and raised fears of a full-blown credit crunch.
The Fed went further a couple of months later when, for the first time, it began directly purchasing debt of creditworthy companies on the open market, on top of indirect investments in other firms whose more risky bonds are rated below investment grade — or “junk.” That bolstered the psychological effect of its presence in the bond markets, which keeps interest rates low and whets investor appetite for still more corporate debt.
Those moves prompted even Trump, who repeatedly torched Fed Chair Jerome Powell for failing to turbocharge the economy before the pandemic struck, to say that the central bank chief has “really stepped up to the plate.”
Yet Sen. Pat Toomey (R-Pa.) at a hearing last month with Powell questioned why the Fed started buying bonds even though markets were functioning smoothly. Toomey, a free market proponent, argued that the central bank risks making it harder for investors to judge the relative strength of companies because bond rates are being kept lower across the board.
“I don’t see us wanting to run through the bond market like an elephant snuffing out price signals,” Powell responded.
The Fed seems to be retiring the Phillips curve approach to forecasting inflation and, as a result, will likely keep rates near zero even if inflation starts to meaningfully pick up: @TimDuy t.co/tdrJkMRZ79
— Lisa Abramowicz (@lisaabramowicz1) July 17, 2020