• Thomas Parker

Federal Reserve commits to buying corporate bonds in "QE infinity"

Updated: Apr 2, 2020

Having already used every strategy it used from the 2008 financial crisis, the Federal Reserve is now saying it will do whatever it takes to keep the economy from collapsing from the coronavirus fallout.

The Federal Reserve Board said over the weekend that it "is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time." Their announcement laid out a list of actions that the Federal Reserve will take.

Some of the actions, called "aggressive efforts" by the Fed, are unprecedented for the U.S. central bank. The Fed had previously restarted its bond and securities purchasing program known as quantitative easing (or QE), but it is now expanding the program to new purchases such as corporate bonds.

The Fed expanded programs that will guarantee debt issued by just about everyone, from companies to state and local governments. The central bank said it will not buy municipal debt directly, but the effect of a guarantee gone bad would be just that.

The Federal Reserve is also injecting credit into the economy by issuing "asset-backed securities," loans that are backed by student loans, auto loans, and other loans guaranteed by the Small Business Administration.

In addition to the SBA, the Federal Reserve itself plans to begin issuing loans to "eligible small-and-medium sized businesses," in addition to using the programs described in their announcement to provide loans to larger businesses.

Previously, the central bank placed a dollar figure on its asset purchases, but this time the Fed left its potential spending open-ended, saying it will expand quantitative easing well beyond the nearly $1 trillion in bonds it committed to purchasing just over a week ago.

“Fed policy is shifting into a higher gear to try to help support the economy which looks like it is in freefall at the moment,” wrote Chris Rupkey, chief finacial economist at MUFG Union Bank. “The central bank is shifting from being not just the lender of last resort, but now it is the buyer of last resort. Don’t ask how much they will buy, this is truly QE infinity.”

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