<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The Federal Reserve is going to have a tough time unwinding the credit risk it’s absorbing amid the novel coronavirus, Allianz Chief Economic Adviser Mohamed El-Erian told Yahoo Finance in a new interview.” data-reactid=”16″>The Federal Reserve is going to have a tough time unwinding the credit risk it’s absorbing amid the novel coronavirus, Allianz Chief Economic Adviser Mohamed El-Erian told Yahoo Finance in a new interview.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="El-Erian told Yahoo Finance’s On the Move on Thursday that the central bank’s willingness to backstop the high-yield corporate debt market presents challenges to the Fed’s credibility and independence.” data-reactid=”17″>El-Erian told Yahoo Finance’s On the Move on Thursday that the central bank’s willingness to backstop the high-yield corporate debt market presents challenges to the Fed’s credibility and independence.

“We’re going to come out of this with a massive entanglement of both the Fed and the government in private sector activity,” El-Erian said, comparing the tie-up to a “spaghetti bowl.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="As businesses remain shuttered across the country, the Fed has opened up nine liquidity facilities in an effort to prevent a seizing up in markets ranging from U.S. Treasuries to municipal debt.&nbsp;” data-reactid=”19″>As businesses remain shuttered across the country, the Fed has opened up nine liquidity facilities in an effort to prevent a seizing up in markets ranging from U.S. Treasuries to municipal debt. 

14 February 2020, Bavaria, Munich: Mohamed Aly El-Erian, former CEO of the Pacific Investment Management Company, speaks on the first day of the 56th Munich Security Conference. Photo: Felix Hörhager/dpa (Photo by Felix Hörhager/picture alliance via Getty Images)14 February 2020, Bavaria, Munich: Mohamed Aly El-Erian, former CEO of the Pacific Investment Management Company, speaks on the first day of the 56th Munich Security Conference. Photo: Felix Hörhager/dpa (Photo by Felix Hörhager/picture alliance via Getty Images)
14 February 2020, Bavaria, Munich: Mohamed Aly El-Erian, former CEO of the Pacific Investment Management Company, speaks on the first day of the 56th Munich Security Conference. Photo: Felix Hörhager/dpa (Photo by Felix Hörhager/picture alliance via Getty Images)

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Two facilities in particular have caught attention for their novelty: the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility.&nbsp;” data-reactid=”31″>Two facilities in particular have caught attention for their novelty: the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility

The first facility would allow the Fed to directly purchase investment grade debt through a special purpose vehicle opened in conjunction with the U.S. Treasury. The scope of the facility was expanded to also cover “fallen angel” debt, assuming the issuer was downgraded below investment grade after March 22.

The second facility would take on bonds in the secondary market, including some U.S. high-yield corporate bonds. 

Both facilities have yet to be officially opened, but the Fed says the facilities can make up to $750 billion in funding available.

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Fed: ‘That’s okay’” data-reactid=”35″>Fed: ‘That’s okay’

El-Erian says the facilities underscore the Fed’s shift toward monetary policy that more heavily prioritizes the credit channel. With rates already at near-zero and quantitative easing essentially uncapped, the Fed has had to rely on its powers as a lender of last resort.

“The fact that a central bank is willing to selectively go into high yield is revolutionary,” El-Erian said. “Remember, central banks are not supposed to take on credit and default risk.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Fed Chairman Jerome Powell on Wednesday acknowledged that it is deploying unconventional tools in these unprecedented times.” data-reactid=”38″>Fed Chairman Jerome Powell on Wednesday acknowledged that it is deploying unconventional tools in these unprecedented times.

WASHINGTON, DC - APRIL 29: In this screengrab taken from the Federal Reserve website, Chair of the Federal Reserve Jerome Powell issues the Federal Open Market Committee statement on April 29, 2020 in Washington, DC. Powell said the Federal Reserve will continue to use its lending powers “forcefully, proactively and aggressively, until we’re confident that we are solidly on the road to recovery” from the economic downturn caused by the coronavirus pandemic. (Photo by Federal Reserve via Getty Images)WASHINGTON, DC - APRIL 29: In this screengrab taken from the Federal Reserve website, Chair of the Federal Reserve Jerome Powell issues the Federal Open Market Committee statement on April 29, 2020 in Washington, DC. Powell said the Federal Reserve will continue to use its lending powers “forcefully, proactively and aggressively, until we’re confident that we are solidly on the road to recovery” from the economic downturn caused by the coronavirus pandemic. (Photo by Federal Reserve via Getty Images)
WASHINGTON, DC – APRIL 29: In this screengrab taken from the Federal Reserve website, Chair of the Federal Reserve Jerome Powell issues the Federal Open Market Committee statement on April 29, 2020 in Washington, DC. (Photo by Federal Reserve via Getty Images)

“We are clearly moving into areas where there is more risk than there has been in the past, and that’s okay,” Powell said. “I think that’s what we’re supposed to do.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The Treasury is providing equity and credit protection to the Fed’s liquidity facilities, which in theory should be able to absorb any potential losses under the programs. The Coronavirus Aid, Relief, and Economic Security (CARES) Act appropriated $454 billion to the Fed and the Treasury for these programs.” data-reactid=”51″>The Treasury is providing equity and credit protection to the Fed’s liquidity facilities, which in theory should be able to absorb any potential losses under the programs. The Coronavirus Aid, Relief, and Economic Security (CARES) Act appropriated $454 billion to the Fed and the Treasury for these programs.

Programs announced so far would use up less than half of that appropriation.

El-Erian said the Fed’s actions are designed at preventing liquidity problems from evolving into solvency problems, where capital is impaired permanently.

Broadly, El-Erian said the Fed could avoid damage to its credibility and independence if fiscal policymakers can step up with more aggressive measures to support Main Street businesses through the crisis.

“I still think that we’re going to have the worst recession since the Great Depression,” El-Erian said. “It will make 2008-2009 look like a flesh wound.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter&nbsp;@bcheungz.” data-reactid=”56″>Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Read the latest financial and business news from Yahoo Finance” data-reactid=”63″>Read the latest financial and business news from Yahoo Finance

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