January 23, 2022

Fed saves the American economy

How The Fed Is Trying To Prevent A Financial Crisis

Fed saves the American economy

Fed saves the American economy

The Federal Reserve Program now owns Warren Buffett’s bonds.

Berkshire Hathaway, worth $ 426 billion, is listed as one of the many companies whose bonds were bought special fund of the FRS.

Blue chips of other major market participants, including Walmart, Boeing, ExxonMobil and Coca-Cola also hit the regulator’s program launched this month. 

It is worth noting that Berkshire did not ask for help from the Fed, and this acquisition will not significantly affect the current position of the company. However, the fact that Berkshire Warren Buffett fell into the area of ​​action of the regulator, emphasizes, how seriously the Fed is going to support capital markets. This raises concerns among some experts that this experiment may negatively affect the normal functioning of markets..

«Warren Buffett, don’t worry, the Fed has your back. US monetary policy has broken through another bottom», – wrote on monday Peter Boquard, Chief Investment Officer, Bleakley Advisory Group. 

Buffett, whose condition today Forbes estimates at $ 69.8 billion, it is the fourth richest person in the world. He owns 37% of the class «AND» Berkshire Hathaway, a holding company with interests in Apple, Bank of america, Wells Fargo and other large corporations.

Of course, Berkshire, along with many other companies whose bonds have been repurchased, already benefit from very cheap borrowing costs.. Berkshire’s extremely strong balance sheet says there is no problem finding buyers for its bonds.

«This is really confusing. Warren Buffett doesn’t need Fed backing» – said Daniel Dimartino Booth, CEO and Chief Strategist of Quill Intelligence.

However, the fact that the Fed provided support shows that the regulator’s response to the pandemic is even bolder and more ambitious than its actions during the global crisis.. A decade ago, the Fed cut rates to zero by buying up a ton of US Treasuries, mortgage bonds and financing the bailout of insurance giant AIG..

This is the first time the Fed is deciding to buy corporate bonds, including risky junk bonds, through its corporate secondary market lending institution.. 

A simple announcement that the Fed would be absorbing corporate bonds was enough to instantly revive this market, frozen in March..

Carnival, Ford and other companies that were not active in debt markets suddenly gained access to capital. The Fed stressed that its emergency interventions in financial markets have real benefits for ordinary citizens of the country..

«We want to keep the market functioning. When markets are open, businesses and people can borrow», – said the head of the Fed Jerome Powell.

Powell added that when companies have access to borrow, they are less likely to take action to cut costs and lay off employees..

However, unlike the payroll protection program, which provided special loans to small businesses, the Fed’s corporate bond buying program does not have conditions requiring them to hold on to employees.. In other words, nothing is stopping a company whose bonds are now held by the Fed from laying off thousands of workers..

The Fed Fund, which is controlled by the New York Fed, announced on Sunday which bonds were purchased between June 16th. This list includes bonds Caterpillar, Ford, Dollar general, Home Depot and Marriott.

It should be noted that these securities are not new and have already been traded in the markets before..

Fed New York also published a list of 794 companies that meet its buyout criteria. American subsidiaries of a number of foreign corporations are also in the focus of the regulator, including Toyota, Volkswagen and Mercedes-Benz Daimler. These automakers are major employers in the United States, especially in the Southeast.

The purpose of the Fed program is not to help specific companies, but to make sure that solvent market participants have access to capital. Without this, the growing wave of bankruptcies will cover the country, potentially plunging the economy into a new financial depression, the representatives of the regulator point out..