Will the Fed start buying equities?
Just when you thought the world of money could not get any more unusual, there is now talk – albeit only talk at this stage – of the Federal Reserve possibly buying equities.
As reported by Reuters here, former Fed Chair, Janet Yellen, told a banking conference in Kansas City that the Fed might be able to help the US economy during a future downturn by buying stocks and corporate bonds.
This might sound strange to many. Why would the Fed, as the central bank of the United States tasked to manage inflation and employment, feel like buying stocks is a good idea?
In short, the logic would be to increase asset values. (Sound familiar?) Depressed asset values are not good for an economy. Indeed, depressed asset values depress collateral values and can restrict the flow of credit into the economy. Furthermore, depressed asset values make consumers “feel” poorer, resulting in a reduction of spending to boost savings. Both of these dynamics suppress economic growth.
Now, Ms Yellen did point out that the Fed is currently barred by law from buying corporate assets. Will this change? For what it’s worth, your author thinks it will take only one more significant downturn for these rules to be relaxed.
The precedent here is Japan. Today, the Bank of Japan (i.e. Japan’s Fed-equivalent) owns around 80 per cent of Japan’s outstanding equity ETFs and 50 per cent of all outstanding government bonds. These are mind-blowing numbers. But remember, in the same way that Japan showed the world how to do QE many years in advance, it is not unreasonable to imagine they are doing the same thing again here.