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As new evidence of the economic toll from the coronavirus pandemic floods 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, Proactively

“We will continue to use these powers forcefully, proactively, 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.

© Bloomberg 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.”

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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.

Read More: Powell Pushed to Edge of Fed’s Boundaries in Fight for Economy

“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.”

”That does present some moral hazard but a lot will depend on how these programs are executed and how they’re unwound,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “Are they executed in a way that doesn’t unduly benefit people? If the programs are devised effectively, hopefully that won’t be the case.”

The Fed has deployed nearly every tool in its toolbox since March to try and help keep lending flowing in the economy -- as businesses shuttered to stem the spread of the virus. It’s unleashed programs used in the 2008-2009 financial crisis to improve liquidity in the Treasury and credit markets, and reached into unchartered territory to support American businesses, states and local governments.

In its latest announcement, the Fed laid out details of the heavily anticipated Main Street Lending Facility, which will deliver funding to companies much bigger than those yet eligible for help. Eligible borrowers can have up to 10,000 employees or up to $2.5 billion in annual revenue. Loan sizes will range from $1 million to $150 million.

Borrowers will be subject to restrictions imposed by the $2.2 trillion stimulus package that Congress passed in the CARES Act including on employee retention, distribution of dividends and other factors. The program will be backstopped by $75 billion from the Treasury to absorb losses. Banks that handle the loans will be required to retain a 5% interest in each loan, with the facility purchasing the remainder.

Fallen Angels

In a move that surprised some investors, the central bank will also expand its bond-buying program to include debt that was investment-grade rated as of March 22 but was later downgraded to no lower than BB-, or three levels into high yield. It’ll also buy exchange-traded funds, the preponderance of which will track investment-grade debt along with some that track speculative-grade debt. Together, the programs will support as much as $850 billion in credit.

“The reason the Fed had to expand the pool of credit that they are willing to buy is that so many borrowers are slipping into these lower-rated categories,” said Mark Vitner, senior economist at Wells Fargo Securities. “This is aimed more at fallen angels rather that dastardly devils.”

Read more: Credit Risk Eases Dramatically With Fed to Buy Fallen Angels

The Fed also said it will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

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