The Fed has still not acted on its promise in February to purchase essentially unlimited amounts of investment grade and junk corporate debt and ETFs. While a yield chasing frenzy has allowed marginally investment grade issuers – including Walking Dead extras Carnival and Boeing – to raise stonking amounts of debt without the central bank’s help, the Fed risks losing credibility. Given its hopes to manage its balance sheet bloat through a yield curve control (YCC) policy, its timing couldn’t be worse.

The Fed’s empty jawboning has not gone unnoticed. On Friday, Bank of America credit analysts wrote:

Note to Fed: a lot of investors (including non-credit ones) have bought IG corporate bonds the past two months. . . on the expectation they can sell to you. So would be helpful if you soon began buying broadly and in size. (H/T Grant’s Almost Daily)

On April 23, Wolf Richter wrote:

So over the past four weeks, the Fed has not done any of the things with these SPVs and Primary Dealers that the markets were raving about it would do. It didn’t buy junk bonds, it didn’t buy ETFs, it didn’t buy stocks, it didn’t buy old bicycles. But Wall Street sure loved raving about it.

The situation hadn’t changed as of last week’s Fed balance sheet report.

The Fed’s credibility, always crucial, is particularly important now, with central bank grandees considering using a YCC policy to control rates without further ballooning its balance sheet. In essence, this involves telling the market that it will buy Treasuries at a given price. No one sells lower than that, knowing they can sell to the Fed, so rates stay at the target level, even if the Fed doesn’t actually buy much. But for that to work, as it did during World War II, the market has to believe the Fed will support the peg.

Hence the need for credibility, which the Fed is now frittering away.