How new Fed corporate bond programs cushioned the Covid-19 recession

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 corporate bonds rated as investment grade before the Covid pandemic. We assess the effectiveness of this program using long sample periods, spanning the Great Depression through the Great and Covid Recessions. Findings indicate that the announcement of corporate bond backstop facilities helped stop risk premia from rising further than they had by late-March 2020. In doing so, these backstop facilities 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. Published by Elsevier B.V.

Publisher

Elsevier

Publication Date

3-1-2022

Publication Title

Journal of Banking & Finance

Department

Economics

Document Type

Article

DOI

https://dx.doi.org/10.1016/j.jbankfin.2022.106413

Keywords

Financial crises, Federal Reserve, Credit easing, Lender of last resort, Corporate bonds, Corporate bond facility

Language

English

Format

text

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