The Fed isn't worried about enabling risk-takers as its massive stimulus attempts to revive markets and the economy, Cleveland chief says
- The growing interest in high-risk lending may be a necessary consequence of the Fed's emergency relief measures, Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in a Friday interview with Bloomberg TV.
- The central bank announced last week it would begin buying junk-bond ETFs, prompting a surge for the category as traders looked to ride a wave of fresh stimulus.
- The Fed can't "be that concerned about these kinds of moral hazards" as investors flock to risk, Mester said.
- The priority is to bridge "a hugely and negatively impactful shock" the likes of which the Fed has never experienced, she added.
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The coronavirus' significant hit to financial markets is too threatening to worry about some side effects, Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Friday.
The central bank has moved into uncharted territory with its salvo of relief measures, recently announcing it will begin buying corporate debt to protect against heightened risk of default. Soon after, several analysts suggested clients should buy what the Fed buys soon after the policy was revealed. Bonds and bond exchange-traded funds subsequently enjoyed an upward surge on central-bank aid and fresh investor optimism.
Where some see the move as encouraging high-risk lending down the road, Mester doesn't view the issue as a priority.
"I don't think we can be that concerned about these kinds of moral hazards," the Cleveland chief said in an interview with Bloomberg TV. "This is a hugely and negatively impactful shock, and we have to do all we can to make sure we're not doing permanent damage to the underlying fundamentals of the economy."
The Fed's move into corporate debt purchases is a first and emphasizes the lack of precedent in dealing with a rapid and unpredictable slump. The central bank is now acting in "unprecedented territory," Mester said, forced to lend to businesses "that through no fault of their own were impacted by the virus."
The Fed's various lending facilities weren't first open to high-yield debt, but its latest expansion of relief measures worth $2.3 trillion opened its purchases to junk-bond ETFs. The central bank also opened a facility for municipal bonds, further spreading its influence on ailing credit markets.
Buying junk-bond ETFs isn't meant to encourage similar moves among investors or offer direct aid to risky companies, Mester told Bloomberg. Instead, the policy looks to shore up liquidity in the troubled market.
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