The Federal Reserve’s emergency coronavirus programs have unleashed the possible dangers of moral hazard in financial markets once again. Former NY Fed President William Dudley explained the situation to Bloomberg. Alister Bull reports:
Federal Reserve support for U.S. corporate debt, designed to preserve market functioning during the coronavirus pandemic, could have the unintended consequence of encouraging more risky behavior, said former New York Federal Reserve Bank President William Dudley.
“People who have high-yield debt that’s outstanding, a lot of times that’s happened by choice,” he told Bloomberg Television on Wednesday in an interview with Tom Keene, Lisa Abramowicz and Jonathan Ferro. “So for the Federal Reserve to intervene and support those asset prices, is basically creating a little bit of moral hazard in the sense you’re encouraging people to take on more debt.”
Dudley, who stepped down from the New York Fed in 2018, said the Fed’s intention was not to bail out individual borrowers, but ensure “that people actually can access that market and raise high-yield debt. And I think they’ve been quite successful in those efforts.’’
The Fed has unveiled a range of emergency lending programs since March to keep credit flowing during the pandemic. Officials are expected to hold interest rates near zero at their meeting next week and re-commit to using their full range of tools to support the U.S. economy during the coronavirus pandemic.
More than 40 million U.S. workers have filed for unemployment benefits in the past 2-1/2 months as businesses shuttered and Americans stayed home to limit the contagion.
Payroll data due Friday is expected to show the unemployment rate surged to 19.5% in May, the highest level since the Great Depression.