Very recently, in an attempt to prop up the bond market during the COVID pandemic, the...

Very recently, in an attempt to prop up the bond market during the COVID pandemic, the Federal Reserve began purchasing the corporate bonds of very credit-worthy firms and through an ETF, below-investment grade corporate debt. Explore the relationship between these actions and moral hazard.

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Expert Solution

Answer: The Federal reserve's actions put the negative impact and reflects that bank sent the world a (buy signal)through its programs propping up the corporate bond market. That concern has been echoed by Fed veterans.

People who have high-yield debt outstanding, a lot of times that happens by choice will have no surity about returning it back .

The Federal Reserve has intervene and support those asset prices, is basically creating a little bit of a moral hazard in the sense that encouraging people to take on more debt that can create more problems in future.

The lending facilities provided by Federal also slashed rates to near zero and pledged unlimited quantitative easing, ballooning its balance sheet. That’s confined benchmark 10-year Treasury yields to low levels.

Federal policies “absolutely” don’t add to inequality and its real aim is to preserve jobs by keeping companies afloat. Federal doesn’t respond to that or even tightens in that environment which exacerbate the situation and make it far worse.

Rahul Sunny answered 1 year ago

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