19th October 2020
Has central bank interference in capital markets gone too far? Thursday’s announced extension to the Fed’s corporate bond purchasing programme to include fallen angels and high yield ETFs marks a truly astonishing development. Perhaps even calling into question the role of capital markets within the economy itself.
Throughout this crisis many have asked whether the continued economic shutdown is a price worth paying to fight the virus. It represents a trade-off between saving lives and health services today and prolonged economic hardship tomorrow. As difficult a question as it may be, it can in some way be quantified. The impact of central banks’ interference with the operation of capital markets on the other hand is a far more nuanced issue. The real economy needs significant support and fast. The capital markets need to know that there is adequate liquidity to operate with some degree of efficiency and stability. However, when do we know when central banks have crossed that line from market support to market manipulation, and who decides who wins and who loses? Who even controls the process when the lines between the treasury and central banks have become so blurred? When we see US Hedge Funds looking to tap into the Paycheck Protection Programme, notwithstanding the fact that the Fed is already lending enormous support to their over-leveraged portfolios, we do have to question what dimension we are living in!