The Fed Should Never Lend to Anyone Other Than Banks
By extending credit to nonfinancial companies, the central bank sacrifices its independence to do the White House’s bidding.
Tunr back now.
Photographer: Sarah Silbiger/Getty Images North AmericaThis morning, the Federal Reserve announced two entirely novel interventions in the corporate debt market: the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF). If used appropriately, the latter is a smart and defensible use of central bank power to stabilize liquidity conditions in a key financial market. The former is an indefensible attempt by the Fed and the administration to sidestep Congress.
Consider where we are. The spreads on corporate bonds have widened markedly in the past few weeks. Like all movements in yields, this one has two sources. First, corporate bonds have gotten less liquid: Buyers have rising concerns that, if they needed cash, they wouldn't be able to resell the bonds quickly without taking a big loss. Second, corporate bonds have gotten riskier: buyers are increasingly worried that corporations won't have the cash flow to repay their debts.