The Fed's Slippery Slope of Purchasing Corporate Bonds

In an attempt to rejuvenate the fallen COVID Economy, the Federal Reserve pursued one of their many unprecedented policies in 2020 by purchasing corporate bonds in the secondary market. The $750 billion bond buying program involves the Fed printing money that is then allocated to the Department of Treasury, who at their own discretion may make investment decisions with that money. Some of the notable companies the Federal Reserve maintained holdings in were Apple, Microsoft, Boeing, Goldman Sachs, J.P. Morgan, and many other of America’s most powerful corporations. This has brought up many concerns about whether or not the Fed should be providing support for America’s wealthiest, and also begs the question: Is the Federal Reserve investing in some companies and not others a form of government favoritism and corruption? In this piece, the implications of this policy, both economic and ethical, will be broken down.  

Such ill advised monetary policy is simply unacceptable knowing what occurred in 2008, as the Federal Reserve cannot continue to apply bandages on the economy to prop up markets, when there’s significant underlying issues at play. Following the dot-com bubble at the turn of the century, Federal Reserve Chairman Alan Greenspan cut interest rates to try and rejuvenate the recessed economy, consequently leading to loans being made out to extremely low credit lenders who could not actually afford what they were paying for. On top of this, far more loans were made out to businesses, when natural loanable funds (savings) were not high enough to sustain such investment. Both these conditions resulting from such an artificial credit expansion precipitated malinvestments and unsustainable growth, which ended up turning into the beast of the Great Recession. 

Fast forward 12 years and the Federal Reserve once again reached deep into its bag of tricks, particularly with its large scale quantitative easing programs, in which one of its many provisions involved purchasing corporate bonds. This serves to be far more dangerous than previous open market operations the Fed has pursued. 

Since March 2022, the Federal Reserve has gone on to raise the federal funds rate by 75 basis points, with many more rate hikes to come. This marks the beginning of when businesses will begin to liquidate the malinvestments made during the Fed’s Quantitative Easing program. The stock market has reacted almost immediately, with the S&P 500 down 12% in the last month alone, and tech stocks especially taking a dive, represented by the NASDAQ down over 16% during the same period. There is no understating the severity of the market’s downturn, which has yet to even reach its trough. 

As if economic distress wasn’t enough, the Fed’s purchasing of corporate bonds also sets some precedents that lead one to take a step back and really reconsider what our government is enabling. Foremost, the fact that the Fed is purchasing corporate bonds of some of America’s most powerful companies should raise some eyebrows. Why is the Fed purchasing ETFs with Google but not Yahoo? Why Anheuser-Busch but not Coors Brewing Company? The list goes on. 

As Milton Friedman's famous essay posits, a corporation's only social responsibility is to increase its profits. If one of the corporations that wasn’t a beneficiary of such policy sees that the Federal government is now picking favorites that they’d like to subsidize, it would make sense for them to try and convince some government officials to subsidize them instead. This leads to increased lobbying efforts, and more companies meddling in the political sphere. Any such intervention by the government will inherently create perverse incentives, changing how a corporation may have acted in an unhampered market. 

Moreover, what’s to say this is the extent to which the Federal Reserve will intervene? Twenty years ago, the Greenspan put was considered revolutionary, yet in hindsight it’s considered moderate compared to the federal funds rate maintained throughout the 2000s. When Quantitative Easing was first used in the United States, it was a similarly radical tool, which is now the go-to after every economic recession. Similarly, Bank of Japan began purchasing corporate bonds in the 1990s, and soon enough they were the first central bank to purchase direct stocks. And in 2021 they hit the “milestone” of becoming the largest shareholder of stocks in their domestic economy. If the future of the United States holds anything near a central bank taking control of a large portion of industry, it may be best for capitalists to seek refuge in another nation.

Policies like this really call into question the motives of the Federal Reserve, and they put into perspective how far the institution has gone, all in the name of the “public good.” It is imperative that people be made more aware of what America’s most powerful monopoly has done, and how much more they’re able to do. We must curtail the Fed’s commanding influence, and allow the United States to bring about a market economy that will allow us to flourish.