Breaking down the Fed's corporate debt-buying program

On Tuesday, the Federal Reserve kicked off its purchases of corporate bond exchange-traded funds. The Secondary Market Corporate Credit Facility will be managed by BlackRock. Yahoo Finance’s Brian Cheung breaks down what the historic move means for the central bank on The Final Round.

Video Transcript

MYLES UDLAND: The Federal Reserve and their latest action to get into the bond market in a more concrete fashion-- they're working with BlackRock to make this happen. Brian Cheung joins us now for the details on this program, Brian, which has been announced, but I think in a world where every Fed action is part of some big conspiracy to manipulate the market, I think it is worth breaking down just what is happening starting today.

BRIAN CHEUNG: Yeah. Well, so today, it was the first day that the Federal Reserve had its Secondary Market Corporate Credit Facility up and running. The Federal Reserve actually announced this back in March, but it took some time for the Fed to get this thing up and running. And through this SMCCF, the Fed will be directly buying some types of corporate bond ETFs.

And for those that are wondering, oh, wait. Does this mean that the Federal Reserve is buying SPY? No, it doesn't mean that the Fed is buying equity ETFs specifically for corporate bond, mostly investment-grade, although they will be taking some junk bond ETFs in the open market. Now, the Federal Reserve just getting that started up today, which means two things.

First of all, we'll be able to see the volume of these types of transactions through the Federal Reserve's weekly Federal Reserve balance sheet data, which comes out every Thursday at 4:30. Unfortunately, I'm one of those people that obsesses over these things week, after week, after week.

And then we will also have granular detail, according to the Fed, on the actual types of bonds that it's buying-- rather, corporate bond ETFs it's buying through this program. The Federal Reserve says it will announce that monthly. We don't exactly know where they'll be publishing that or what day they'll be publishing that, but Jerome Powell saying that he wants to be transparent with how the Fed is using these facilities.

And then Brian, just quickly, tomorrow morning, we expect to hear or we are going to hear from Jay Powell speaking at the Peterson Institute. Any sense of if he's going to change his message? Is there anything that he needs to say, I guess, to the market at this point that hasn't kind of already been said, both by his words, but I think, you know, today's program shows the Fed's actions are also something you can just look at and get a sense of what they think needs done to keep the plumbing in the system going.

Yes. As you mentioned, Jay Powell will be speaking for the first time since his press conference two weeks ago with the Peterson Institute tomorrow morning at 9:00 AM, right before the market opens. And as far as what he's going to say, all we know is that it's going to be some sort of update on the outlook from his perspective.

But as you mentioned, it seems like we've already gotten all the color that we need from the Federal Reserve with regards to its primary focus right now, which is those liquidity facilities-- those nine liquidity facilities dealing with seemingly everything under the sun, except for equities themselves. But I think one thing worth mentioning is, obviously, negative interest rate policy. Right?

We heard Jay Powell say at the end of last year that he didn't think negative interest rates are appropriate in the United States. And obviously, with the president hammering today on Twitter that he would like to see negative interest rates here in the United States, you might expect to see Jay Powell clarify tomorrow that he doesn't think that's on the table.

The reason why I think he might say that is because everybody else in the Federal Reserve System has been saying the same thing. We had Jim Bullard from the St. Louis Fed here on Yahoo Finance, arguably one of those people who, if anyone in the Fed wanted to take rates lower than where they are right now at the zero bound, it would be Jim Bullard.

He was telling us that he doesn't think that it's really practical to be implementing that here in the US because of how short-term funding markets operate. And then OK, maybe Neel Kashkari might support it then, right? Well, he reportedly said earlier this morning that he thinks the Fed is, quote, "pretty unanimous in opposing them."

Which I think, by the way, is just a funny thing for a Fed official to say, because most the time, these speeches start off with, I don't speak on behalf of the whole Federal Reserve system. But you have Neel Kashkari saying, it's pretty unanimous among all those Fed officials that they don't see the case for negative interest rates. So that might be the nail in the coffin. But I think Jay Powell might have the opportunity to explicitly say that in tomorrow's appearance.

MYLES UDLAND: Yeah, if for no other reason than, I don't know, everyone gets very offended by negative interest rates. Asset purchases work better. Sorry. It's a better way for the Fed to go about achieving its goals. Certainly, it's done a lot more to protect the economy in this downturn than-- its actual policy rate doesn't really matter in the context of the, what, 15 facilities, 17 facilities they've unloaded? Something like that.

So again, conversation that's been going on for several years, will continue to go on so long as there's negative rates anywhere in the world. All right. Brian Cheung, thanks for joining us. Talk to you tomorrow.