The Federal Reserve's corporate debt purchases came under criticism Sept. 23, with a report from House Democrats finding that the Fed bought bonds issued by companies that laid off more than 1 million employees since March.
More than 383 companies included in the Fed's broad purchases of corporate debt have made dividend payments to shareholders during the COVID-19 pandemic, the report from the House added.
The report shows that the Fed's program "failed to include any protections" for workers while benefiting corporate executives and bond investors, said Rep. Jim Clyburn, a South Carolina Democrat who is part of the House majority leadership.
"While I recognize that during severe economic crises, federal government assistance for large corporations can be necessary to support the wider economy, public support must always be undertaken to achieve maximum public benefit," Clyburn said during a hearing.
Fed Chairman Jerome Powell defended the bond purchases, telling lawmakers the program successfully eased the turbulence that rocked corporate debt markets in March, when companies' borrowing costs skyrocketed and threatened to lead to more job cuts.
Large companies are now able to borrow from bond markets at low interest rates again, with little need for the Fed to make any purchases thanks to its backstop that calmed the market, Powell said.
"These were big American companies that were under tremendous strain," Powell said. "They could have laid off hundreds of thousands of people and didn't because of this facility, so I would say it's been a success."
The central bank is buying a "very, very small amount of bonds" issued by 800 different issuers, none of whom are getting direct loans from the Fed, Powell noted. Those purchases follow a broad market index the Fed set up under its Secondary Market Corporate Credit Facility, through which the Fed buys already issued bonds in the secondary market rather than directly from issuers.
The SMCCF and the Primary Corporate Credit Market Facility, through which the Fed has promised to lend to companies directly, are authorized to purchase up to $750 billion in corporate bonds. The latter facility has made no direct loans to companies because bond markets are functioning again, while the SMCCF had made roughly $13 billion in purchases as of Sept. 16. The Fed's secondary market purchases have dwindled to nearly $20 million a day, so the central bank is "barely present in that market at all" today given its massive size, Powell said.
The report had flagged 140 examples of companies in the Fed's SMCCF index purchases that laid off or furloughed employees. That included Boeing Co., which announced it would lay off about 16,000 employees after tapping corporate bond markets; the defense contractor Raytheon Technologies Corp., which said this month it would up its planned layoffs to 15,000 employees; and the oil-field services company Schlumberger Ltd., which said in July that it would cut about 21,000 jobs.
Democrats also took issue with the Fed's purchases of debt from energy companies, with the report saying those investments fuel climate change and are risky given the increase in bankruptcies in the sector.
Powell said the Fed wanted to avoid picking "winners and losers" through its creation of a broad market index of eligible companies.