How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the COVID-19 Recession

Michael Bordo and John Duca

No 2029, Working Papers from Federal Reserve Bank of Dallas

Abstract: In the financial crisis and recession induced by the COVID-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned bonds of corporations rated as investment grade before the COVID pandemic. A careful splicing of different unemployment rate series enables us to assess the effectiveness of recent Fed interventions in these long-term debt markets over long sample periods, spanning the Great Depression, Great Recession and COVID Recession. Findings indicate that the announcement of forthcoming corporate bond backstop facilities had helped stop risk premia from rising further than they had by late-March 2020. In doing so, these Fed facilities have limited the role of external finance premia in amplifying the macroeconomic impact of the COVID pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort and pursuing credit policies.

Keywords: financial crises; Federal Reserve; credit easing; lenders of last resort; corporate bonds; corporate bond facility (search for similar items in EconPapers)
JEL-codes: E51 G12 (search for similar items in EconPapers)
Pages: 54
Date: 2020-11-19
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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DOI: 10.24149/wp2029

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