What the US central bank has now done in understandable haste, it may end up repenting at leisure

The US Federal Reserve is right to do whatever it takes to prevent what will undoubtedly be a deep recession from becoming a depression. But the move to buy riskier corporate debt could prove the monetary equivalent of President John F Kennedy’s 1961 decision to dispatch US troops to Vietnam.
Unprecedented is an overused word, but the size, number and novelty of facilities unveiled by the US central bank in recent weeks is without parallel. The latest salvo came ahead of Easter, when the Fed announced another $2.3tn package of measures.
“The Fed appears to be working under the premise that in past crises of historic proportion, there are almost no occasions when the monetary authorities are remembered and accused of doing too much,” noted Alan Ruskin of Deutsche Bank. “So why not load the bazooka with the kitchen sink and go nuclear?”
Mixed metaphors aside, Mr Ruskin is correct. The US central bank’s job is to ensure maximum employment, stable prices and — implicitly — a stable financial system. The coronavirus crisis is a threat to all three. The main burden must fall on governments, but in situations such as this central banks are required to act decisively.
However, some of the Fed’s recent initiatives take it into treacherous territory, from which an exit it may be difficult. Just as Kennedy’s first escalation of the Vietnam conflict inexorably led to a series of seemingly rational but ultimately ruinous decisions and progressive entanglements in Indochina, future central bankers could end up ruing the Fed’s current path.
Among a host of facilities announced on March 23, the Fed unveiled two programmes that would allow it to acquire corporate debt. Initially this was just for safer debts judged to be “investment grade” by the big credit rating agencies. But on April 9 the Fed crossed another Rubicon and announced plans to buy corporate debt rated below that threshold — territory often termed pejoratively but not always inaccurately as “junk”.
Its primary market facility will still only buy bonds that were rated investment grade as of March 22 and have solely been downgraded to junk as a consequence of the coronavirus crisis.
But the Secondary Market Corporate Credit Facility will buy exchange-traded junk bond funds. The Bank of Japan has been buying ETFs for a while, and the European Central Bank has hoovered up some high-quality corporate debt, but coming from the de facto global central bank, this amounts to a watershed moment in the history of monetary policy.
At the same time, a financial crisis-era programme restarted in March was expanded to support top-rated slices of bundles of “leveraged loans” and commercial mortgages. Together, the three facilities come to $850bn — nearly half the size of the Fed’s entire first round of quantitative easing in 2008-10. The intervention has buoyed credit markets, helping a smattering of riskier companies raise financing even before a single dollar has been spent.
Nonetheless, there are many thorny aspects to the Fed’s recent actions. While the difference between investment grade and junk debt is somewhat arbitrary, the central bank’s move is fraught with hazards, both moral and practical.
Many lowly rated companies are owned by private equity firms that have layered on unwise levels of debt on their investments to juice their own returns. Even if they haven’t been rescued directly as banks were in 2008, this still arguably constitutes a de facto bailout. The Fed’s motives may be pure — sub-investment grade companies are huge employers — but a repeat of the pattern of socialised losses and privatised gains is distasteful. 
Even if this can be overlooked in the name of rescuing the economy, the Fed has put itself in an awkward position. Its recent move may be cautious — akin to Kennedy sending a few hundred Green Berets to train the South Vietnamese military in 1961 — but if markets choke again, will it feel forced to move even more forcefully into riskier corporate debt? Just how will it decide who deserves to be helped, and who has to fend for themselves? Should an unelected, independent agency even be allowed to take such momentous decisions?
Longer term, the consequences may be even trickier. The Fed insists that these extraordinary measures are temporary, and will be swiftly terminated once the coronavirus crisis abates. But the financial crisis-era measures were also supposed to be fleeting. The Fed could easily find itself in a quagmire, and subject to ferocious lobbying from various public and private sector actors for measures to support their favoured causes.
The scale and swiftness of the coronavirus crisis required a commensurately massive and rapid response. But what the Fed has now done in understandable haste, it may end up repenting at leisure.