Apr 10, 2020 - Economy & Business

Some economists wary of Fed's coronavirus-driven asset purchases

Data: Federal Reserve; Chart: Axios Visuals
Data: Federal Reserve; Chart: Axios Visuals

Some market analysts and economists have gotten wary of the Fed's expanding laundry list of asset purchases.

Why it matters: The big worry for most is that the Fed is now manipulating larger and larger swaths of what is supposed to be a free market.

  • Just as investors reap gains in good times when the economy is strong, they are supposed to suffer losses when it weakens, and the Fed is artificially keeping that from happening.

What they're saying: "The Fed has redefined moral hazard by acceding its independence to the Treasury Department with the establishment of the Special Purpose Vehicle to purchase corporate bonds which is in direct violation of the Federal Reserve Act," Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, tells Axios in an email.

  • "Investors are wise to the Fed having crossed this red line ... and are acting under the auspices of the Fed continuing to expand the array of assets that qualify, down to junk bonds and eventually stocks. Investors are playing a timing game, shunning toxic paper they deem won’t survive to see the light of Fed purchases."

What's next: Having broken through a barrier by purchasing corporate bonds and even dipping into speculative-grade junk bonds and bonds owned by private equity companies, the Fed has been "pushing the envelope," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, tells Axios.

  • "At this point, I wouldn’t say the Fed buying anything would be off the table."

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