The Federal Reserve’s landmark corporate bond buying program eventually will entail mostly individual company debt rather than exchange-traded funds, Federal Reserve Chairman Jerome Powell said Wednesday.

Powell made the comments before the House Financial Services Committee in the second day of his semiannual testimony on Capitol Hill.

His remarks come the same week the Fed announced it would expand a facility to buy company debt from ETFs into individual securities.

“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.”

In a move that set off a sharp surge in the stock market, the Fed announced in late March it would embark on two facilities to jump into the $9.6 trillion corporate debt market. One would buy bonds directly from the issuers while the other would purchase them on the open market. The latter is the facility that the Fed has opened with some purchases of ETFs, which track indexes of bonds across all grades.

In its announcement to buy individual bonds, the Fed said it would create an index that would include bonds across the market, though issuers must have had a rating of BBB- or Baa3 as of March 22, the day before the announcement.

Powell has stressed that the programs are to ensure proper market functioning.

However, the moves have come under some criticism for including speculative-grade, or junk, debt, particularly companies that were still investment grade before the coronavirus pandemic but have since been downgraded.

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“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, things like that.”

He reiterated his stance that “we’ll put the tools away” including the corporate bond program after they are no longer needed to support markets. In addition to corporate bonds, the Fed also is buying a minimum of $80 billion in Treasurys and $40 billion in mortgage-backed securities each month.



Via CNBC