As fresh evidence of the economic toll from the coronavirus pandemic flood in, the Federal Reserve unleashed another round of emergency measures, including a pledge to provide support to risky corners of financial markets that have been some of the hardest hit.

The Fed said Thursday it will invest up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.

The money comes on top of the massive stimulus that the Fed had already announced and it thrusts the institution into the sort of speculative lending activities it had shunned in the past -- underscoring the risks that Chairman Jerome Powell is willing to take to shore up the economy.

‘Forcefully, Pro-Actively’
“We will continue to use these powers forcefully, pro-actively, and aggressively until we are confident that we are solidly on the road to recovery,’ he said in a speech 90 minutes after the details of the measures were announced.

Just as the Fed unveiled the measures, a new report from the Labor Department highlighted the economic pain: 6.6 million Americans filed for unemployment benefits in the week ended April 4, bringing the number to 16.8 million in the past three weeks.

Filings for U.S. unemployment benefits post third straight week in the millions
“Our country’s highest priority must be to address this public health crisis,” Powell said in a statement accompanying details of the new actions. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”

Junk Debt
Investors quickly bid up prices on corporate bonds and stocks after the announcement. High-yield debt was among the biggest gainers, with some of the largest ETFs tracking those bonds surging the most in a decade.

But the nature of the Fed’s actions pass the traditional boundaries of the central bank to purchase lower-rated debt and the credit of municipalities, raising questions about its future role.

“The Fed has now done virtually everything we think it should be doing and we think it can do,” said Michael Gapen, chief U.S. economist at Barclays Capital in New York.

That said, the direct purchase of municipal debt could put the Fed in an uncomfortable political position, he said.

“It opens the Fed to political criticism for picking winners and losers,” he said. “They’ve stated many times they’d prefer not to do that, and now they’re doing it.

Powell addressed the issue in remarks later Thursday morning during in a webinar hosted by the Brookings Institution.

Moral Hazard
“Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances,” he said in his speech. “I would stress that these are lending powers, not spending powers. The Fed is not authorized to grant money to particular beneficiaries.”

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