Since the start of the coronavirus crisis, the Federal Reserve has won admiration from many quarters for the pace and magnitude of its interventions to stabilize financial markets. Certainly, the Fed has taken crucial steps to resuscitate the liquidity facilities created back in 2008 — as well as developing some new ones. On April 28 it even expanded the Municipal Liquidity Facility, agreeing to purchase large volumes of short-term debt issued by small counties and cities in the United States. Equally striking has been the Fed’s decision to purchase corporate junk bonds.
But little attention has been paid to one very peculiar aspect of the Fed’s actions — namely its relative lack of intervention in the private-label mortgage-backed bonds that come without (either implicit or explicit) US government guarantees. After much panhandling by commercial real estate lobby groups, the Fed has only agreed to purchase the top-rated such bonds issued prior to the crisis. Privately issued residential mortgage-backed securities have been left out of the Fed purchase programs designed to inject liquidity in capital markets.