Fed's Powell says bank's corporate-credit ETF purchases will give way to individual bond buying

• The Federal Reserve's corporate-credit relief will move from exchange-traded fund purchases to taking in individual bonds, chairman Jerome Powell said Wednesday.
• Targeted bond purchases are "a better tool for supporting liquidity and market functioning," Powell told the House Financial Services Committee.
• The statement follows the central bank announcing Monday it would begin individual bond purchases.
• The Fed's Secondary Market Corporate Credit Facility had only been taking in debt ETFs since it began operations on May 12.
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The Federal Reserve will transition from its corporate-credit exchange-traded fund purchases toward targeting individual firms' bonds as it looks to further aid market functioning, chairman Jerome Powell said Wednesday.

The statement, made before the House Financial Services Committee, follows the central bank announcing on Monday its move into bond-buying with its Secondary Market Corporate Credit Facility. The relief program has been taking in ETFs since May 12 and kicked off its individual bond purchases on Tuesday.

"Over time we'll gradually move away from ETFs and move to buying bonds," Powell said. "It's a better tool for supporting liquidity and market functioning."

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The facility will buy up to $250 billion in corporate bonds and ETFs, while the Fed's Primary Market Corporate Credit Facility will directly take in up to $500 billion in debt offerings once it becomes operational. The central bank also announced Monday it would "create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds," assuaging some concerns it would extend broad market relief unevenly.

The Fed's March 23 announcement that it would move into corporate-debt markets sparked a rapid turnaround for risk assets. Stock and bond valuations began a months-long rally that eventually placed the stock market within spitting distance of record highs. Before a single bond was bought up by the Fed, the S&P 500 turned year-to-date positive and subsequently fell below the key threshold on renewed pandemic fears.

Powell has repeatedly noted the SMCCF is primarily tasked with aiding market functioning, yet lawmakers in the Senate and the House of Representatives questioned the chair on whether such relief was still necessary. Investors quickly adopted risk-on attitudes after the Fed's March announcement, allowing firms to easily offer new debt. The chairman noted that market functioning has significantly improved and that the central bank will "put the tools away" once they're no longer needed.

"The markets are working," Powell said. "Companies can borrow, people can borrow. Companies are not showing tons of financial stress, and they're less likely to take cost-cutting measures."

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