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
What’s the outlook for vaccine supply?
Chief executives of America’s COVID-19 vaccine makers promised in congressional testimony to deliver the doses promised to the U.S. government by summer. The projections of confidence come after months of supply chain challenges and companies falling short of year-end projections for 2020. What changed? In part, drugmakers that normally compete are now actually helping one another. This has helped solve several supply chain issues, but not all of them.
How has the pandemic changed scientific research?
Over the past year, while some scientists turned their attention to COVID-19 and creating vaccines to fight it, most others had to pause their research — and re-imagine how to do it. Social distancing, limited lab capacity — “It’s less fun, I have to say. Like, for me the big part of the science is discussing the science with other people, getting excited about projects,” said Isabella Rauch, an immunologist at Oregon Health & Science University in Portland. Funding is also a big question for many.
What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?
Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”
Marketplace is on a mission.
We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.
Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?