May 14, 2020 - Economy

How the Fed has used the value of anticipation to fix the bond market

George Washington.

Illustration: Aïda Amer/Axios

Foremost among Fed chair Jay Powell's achievements during this crisis is that he has fixed a broken corporate bond market. Large businesses with access to capital markets are able to borrow what they need to cover their near-term losses. Impressively, he managed to do so without buying a single corporate bond, at least until this week.

Details: The Fed announced key measures to ensure well-functioning markets on March 23. The Secondary Market Corporate Credit Facility, in particular, unfroze the bond markets: It reassured investors that the Fed would ensure the liquidity they require when they lend money to corporations.

  • Seven weeks later, the SMCCF still hadn't bought a single bond; purchases only started on Tuesday. That was fine: The markets have priced in those purchases since March.
  • The intervening time allowed the Fed to draw up hundreds of pages of agreements detailing how the fund would be administered and managed.

The big picture: Capitalism works when it has the luxury of being able to anticipate the future. Corporate share prices rise when companies announce buybacks, not when they actually do them. Creditors lend new money to avoid a debtor filing for bankruptcy protection from them. Individuals work for two weeks in the knowledge that their work will eventually be remunerated on payday.

The bottom line: The Fed has proved adept at using market tools to fix the market. Millions of individuals and small businesses facing hunger, poverty and ruin, however, had no market access to begin with. Helping them is much harder for the Fed to do.

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