Fed Begins Winding Down Program That Rescued U.S. Economy
The Federal Reserve announced Wednesday that it will begin winding down the emergency rescue program that allowed the purchase of tens of billions of dollars of corporate assets to shore up the economy as the Covid-19 pandemic threatened to plunge the United States into an economic depression.
Most economists agree the decision to enter the equity and bond markets last year by the Federal Reserve was crucial to businesses during the depth of the recession. But as the economy continues to rapidly recover, the central bank has decided to begin winding it down.
Nichols Elfner, co-head of research at Breckinridge Capital Advisors, questioned on the decision by Yahoo news said when asked about the Federal Reserves’ decision, was quoted as saying
“Shock and awe is no longer needed for the time being,”
“The Fed’s decision to begin winding down its portfolio of corporate bonds is an important signal of confidence in the investment-grade corporate market that their presence is no longer needed at this time.”
The Federal Reserve has been insistent that the program has…
“proved vital in restoring market functioning last year, supporting the availability of credit for large employers, and bolstering employment through the Covid-19 pandemic.”
The Federal Reserve is currently holding $13.7 billion worth of corporate assets, including more than $5 billion of corporate bonds and another $8.5 billion worth of exchange-traded funds, a proxy for owning equity shares.
That’s an unprecedented amount of money to unwind, so the Federal Reserve has announced it would sell off those assets over time to keep markets functioning correctly and reduce any resulting shock to the system that might trigger a stock market crash.
In its Wednesday announcement, the Federal Reserve announced…
“Portfolio sales will be gradual and orderly and will aim to minimize the potential for any adverse impact on market functioning,”
The corporate asset purchase amounting to $13.7 billion may be unprecedented. Still, they pale compared to the additional $7 trillion worth of government debt that the Fed said it will continue to purchase to keep the economic recovery humming. During an April press conference, Federal Reserve Chairman Jerome Powell said it wasn’t time to even…
“Start thinking about thinking about” tapering the purchases of Treasury bonds.
So the slow, methodical liquidation of the $13.7 billion of Federal Reserve’s corporate assets amounts to a drop in the bucket of the monies used to prevent a 1930’s economic depression.
Fed to begin winding down corporate bond holdings