(Adds details and context)
By Jonnelle Marte and Howard Schneider
June 2 (Reuters) - The Federal Reserve will begin to unwind the corporate bond holdings it acquired last year through an emergency lending facility launched to calm credit markets at the height of the pandemic, the central bank announced on Wednesday.
The Fed said the sale of its holdings in the Secondary Market Corporate Credit Facility, which includes corporate bonds purchased in the secondary market and exchange-traded funds that invest in corporate bonds, will be "gradual and orderly."
A Fed official said the decision to wind down the corporate credit facility was unrelated to monetary policy. The central bank, as part of its monetary policy, is also accumulating $120 billion a month in government securities and will have to decide when to start scaling that back.
The corporate credit and other facilities had a separate function - to keep credit flowing at the start of the crisis to businesses that might otherwise have been forced under by the fast onset of recession.
"The SMCCF proved vital in restoring market functioning last year, supporting the availability of credit for large employers, and bolstering employment through the COVID-19 pandemic," the Fed said on Wednesday.
The central bank will aim to minimize the potential effect on markets by factoring in daily liquidity and trading conditions for exchange-traded funds and corporate bonds, it said in a statement. The New York Fed, which manages the facility, will provide more details about the sales on Thursday.
The Fed announced two corporate credit facilities in March 2020, at the peak of the market turmoil as the pandemic was unfolding in the United States. While little used in the end - the primary credit facility in fact was never used - Fed officials have said the facilities were successful in signaling to markets that the Fed was prepared to provide a backstop to corporate credit markets.
The facility closed on Dec. 31 after former Treasury Secretary Steven Mnuchin asked the Fed to shut down many of its emergency lending programs and return unused funds.
As of April 30, the facility had $13.8 billion of loans outstanding, including about $8.6 billion of corporate bond ETF holdings and $5.2 billion of corporate bonds, according to Fed data.
The Fed said it intends to sell the full portfolio by the end of the year. It will start by selling its ETFs soon and then begin offloading its corporate bond holdings later in the summer. (Reporting by Jonnelle Marte and Howard Schneider; Editing by Cynthia Osterman)