The Fed on Sunday disclosed its index of nearly 800 companies, including Verizon, Comcast and U.S. divisions of Toyota, Volkswagen, Daimler and BMW. The index essentially represents a snapshot used to guide the Fed’s corporate debt purchases — and widens the scope of questions the Fed could face as it tries to prevent a broader economic collapse. The central bank has said it launched the corporate debt program to support the markets and, in turn, companies in need of cash that are also vying to keep workers on the payrolls.
But as with much of the Fed’s recession response, the central bank has never bought corporate debt like this before, and it’s unclear what the implications of its actions will be.
William Slaughter, senior portfolio manager at Northwest Passage Capital Advisors, tweeted that “it is exceedingly hard to fathom what public interest the Fed is serving by buying bonds of [Apple], [Microsoft] and [Oracle]." Pointing to the foreign automakers that came in near the top of the index, Slaughter asked, “should the Fed really make it easier to lease your next Porsche?” (The luxury car company is owned by Volkswagen.)
The Treasury Department has devoted $75 billion to the Fed’s two corporate credit facilities as part of a pot of money allocated by the Cares Act, which passed in March. The Fed has bought almost $429 million in individual bonds, according to Sunday’s disclosures.
The Fed’s corporate credit facilities are twofold: the “primary market” facility, which officially launched Monday, allows the Fed to purchase bonds directly issued by large companies that apply for certification. The “secondary market” facility purchases already-issued bonds that fall within the index and are trading in the secondary market. The Fed has said that even as the markets have healed significantly since March, the facilities should still be in place in case conditions turn south.
The central bank has said it is well within its legal bounds to include American subsidiaries of foreign companies. The Fed has said it is buying a broad set of bonds reflecting a swath of companies that issue in the American bond market, and many foreign-based companies borrow in that market. Foreign investors, particularly those in Asia and Europe, have scooped up U.S. corporate bonds, which has helped bolster credit markets, and the Fed’s decision to buy corporate debt will give bondholders assurances about their investments.
The index will be recalculated every four to five weeks as new companies meet eligibility requirements and existing ones do not. And with the index, the Fed doesn’t specifically pick and choose which companies to help. Among the 794 companies in the index were a slew of energy firms, along with utilities, tech, capital goods and insurance companies.
Still, some say the makeup of the index raises questions about why the Fed is buying corporate debt in the first place, particularly when the markets have rebounded since the start of the pandemic.
Aaron Klein, policy director of the Center on Regulation and Markets at the Brookings Institution, said the fault wasn’t necessarily with the Fed, whose corporate credit facilities are supported by the Cares Act. But Klein said it’s unclear why the central bank’s response extends to companies that weren’t as vulnerable to national shutdowns that shuttered hotels, casinos and retail stores.
“Why is the solution buying Apple, Microsoft and Comcast debt? Or eBay or Google?” Klein said. “Is the problem in America that the holders of Apple stock need more help? Is the problem that investors in Google debt are likely to suffer catastrophic and unexpected losses from the covid shutdown?”
Fed Chair Jerome H. Powell has said that many of the Fed’s programs are meant to ensure proper market functioning, and that even when the markets are strong, the support keeps companies and individuals in a healthy position to borrow. In testimony before the House Financial Services Committee earlier this month, Powell said that “we’ll put the tools away” once they are no longer needed.
Companies can borrow money by issuing bonds, a type of debt. These bonds must be repaid in a certain amount of time, and companies often repay that debt by issuing new debt. If companies can’t issue new debt, there could be severe economic consequences.
David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at Brookings, said the makeup of the index reflects how globalized the American bond market — and any particular slice of it — is today.
“Who is being bailed out here?” Wessel said. “It’s certainly not the companies — the companies already borrowed the money. The people who are getting help are the people who own those bonds.”
But with any new program comes new challenges. The Fed has signaled that its primary focus is on helping the economy and ensuring that financial markets operate smoothly, and there has been less attention paid to what the repercussions might be later on.
During the financial crisis in 2008 and 2009, the Fed intervened numerous times in ways that officials said prevented an even broader crisis. But politicians later curbed the Fed’s future powers amid complaints about bailouts and the Fed’s unusual powers over the economy.
A number of economists believe the Fed’s actions now could lead to another round of these discussions, but that is not the central bank’s focus at the moment.
“The Fed is doing whatever it can at the moment,” said Diane Swonk, chief economist at Grant Thornton. “The reality is some of it could come back and haunt the Fed. The law of unintended consequences is not one we can worry about now.”