The Federal Reserve started buying corporate bonds Tuesday as part of a $250 billion program funded by the CARES Act, which was approved back in March. The idea is to backstop corporations and their employees.
When a company wants to borrow money, it can issue bonds. The buyers of those bonds are lending those companies money. Now the Fed is going to buy a broad cross-section of corporate bonds, if they meet certain standards. They must have been rated investment grade — that is, less risky — as of March, before the coronavirus lockdowns started.
“The Fed is trying to be helpful because they are really uncertain about what’s going to happen later this year,” said Christopher Whalen, chairman of Whalen Global Advisors.
Whalen said the Fed wants to be sure companies have all the money they need to weather the pandemic. The Fed is also making this program anonymous — just buying up corporate bonds without anybody asking it to. That avoids any stigma from companies requesting Fed help.
“There’s always a concern that if you’re looking to the Federal Reserve as opposed to the market for financing, that you might be revealing something about how desperate you are for financing,” said Kathryn Judge, a Columbia University law professor.
The thinking is that if companies have all the financing they need at reasonable rates with the Fed buying their bonds, they won’t need to lay off more workers.
“The purpose is to help these companies remain good employers in the marketplace, stand on their feet, not lay people off and hopefully bring people back into the workforce,” said Frank Nothaft, chief economist at CoreLogic.
And if a company isn’t able to stay on its feet and defaults on the bonds the Fed bought, Chairman Jay Powell can turn to an emergency fund set up by the Treasury Department to backstop the Fed.
COVID-19 Economy FAQs
How many people are flying? Has traveled picked up?
Flying is starting to recover to levels the airline industry hasn’t seen in months. The Transportation Security Administration announced on Oct. 19 that it’s screened more than 1 million passengers on a single day — its highest number since March 17. The TSA also screened more than 6 million passengers last week, its highest weekly volume since the start of the COVID-19 pandemic. While travel is improving, the TSA announcement comes amid warnings that the U.S. is in the third wave of the coronavirus. There are now more than 8 million cases in the country, with more than 219,000 deaths.
How are Americans feeling about their finances?
Nearly half of all Americans would have trouble paying for an unexpected $250 bill and a third of Americans have less income than before the pandemic, according to the latest results of our Marketplace-Edison Poll. Also, 6 in 10 Americans think that race has at least some impact on an individual’s long-term financial situation, but Black respondents are much more likely to think that race has a big impact on a person’s long-term financial situation than white or Hispanic/Latinx respondents.
Find the rest of the poll results here, which cover how Americans have been faring financially about six months into the pandemic, race and equity within the workplace and some of the key issues Trump and Biden supporters are concerned about.
What’s going to happen to retailers, especially with the holiday shopping season approaching?
A report out recently from the accounting consultancy BDO USA said 29 big retailers filed for bankruptcy protection through August. And if bankruptcies continue at that pace, the number could rival the bankruptcies of 2010, after the Great Recession. For retailers, the last three months of this year will be even more critical than usual for their survival as they look for some hope around the holidays.
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