Fed Needs to Throw a Lifeline to Junk Bonds
It’s a bailout of companies that took too much risk, as well as the banking system. But so what?
Use it or we’ll lose it.
Photographer: Justin Tallis/AFP/Getty ImagesThe Federal Reserve seems determined to do whatever it takes to help protect the U.S. economy from being devastated by coronavirus-related shutdowns. It’s buying so many bonds that its balance sheet is approaching $6 trillion:
Traditionally in recessions, the Fed buys increasing amounts of government bonds, which reduces interest rates. That usually lowers borrowing rates for businesses as well, helping them ride out an economic storm. But in a situation like the present one, that’s unlikely to be enough. Because shutdowns and the danger of disease are threatening many businesses with bankruptcy, they’ll have pay interest rates that reflect the rising risk of default, making it costly and hard for them to borrow in private markets even with Treasury rates at or near zero.