{"id":51725,"date":"2020-03-11T08:00:21","date_gmt":"2020-03-11T12:00:21","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=51725"},"modified":"2020-10-08T17:52:31","modified_gmt":"2020-10-08T21:52:31","slug":"will-the-fed-buy-stocks-next","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2020\/03\/will-the-fed-buy-stocks-next\/","title":{"rendered":"Will The Fed Buy Stocks Next?"},"content":{"rendered":"

Since he became Federal Reserve Chair two years ago, Jerome Powell has created a new mandate for the Fed above and beyond its \u201cdual\u201d Congressional mandate to \u201cpromote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates\u201d (that\u2019s federal government math for you). <\/p>\n

Powell has added putting a floor under stock prices, which usually has come to mean when the market reaches correction territory (i.e., prices fall by about 10%). When stocks reach that threshold, count on the Fed to cut interest rates or loosen monetary policy in order to restore order and investor confidence. So far in his tenure, the Powell Fed has been pretty successful in that regard. Even when overall economic conditions (GDP growth and unemployment) provide no justification for lowering rates, the Fed has stepped in to prop up the market.<\/p>\n

Now, however, the current panic selling over the coronavirus has tested the Fed\u2019s ability to wave its magic wand and restore peace to the market. As we know, the Fed\u2019s recent decision to make an emergency 50 basis-point cut in the federal funds rate three weeks before its next scheduled meeting proved to be a dud. Investor confidence has now been so spooked by the uncertainty created by the virus that the rate cut caused barely a blip, and stock prices continued to tank.<\/p>\n

<\/div>\n

Moreover, despite the market begging for the Fed to cut rates, Powell only opened himself up to criticism for actually delivering. The cut was either too small, some critics said, or a cut would have no effect in such a situation, so why bother doing it, others said. Yet the market consensus now seems to believe that another 50 basis-point cut is already baked in the cake when the Fed meets on March 17-18. But market anxiety being what it is, there\u2019s no assurance that that will have any effect, either.<\/p>\n

Already, many so-called experts are calling for some form of fiscal stimulus, as opposed to monetary stimulus, such as a tax cut or sending out checks - $500 or $1,000 has been bandied about - to taxpayers to boost spending or provide a financial cushion in case things get really bad. <\/p>\n

Then there\u2019s another possibility, raised late last week by Federal Reserve Bank of Boston President Eric Rosengren.<\/p>\n

Speaking at a meeting last Friday of the Shadow Open Market Committee, Rosengren \u2013 who doesn\u2019t currently have a vote on the Federal Open Market Committee, the Fed\u2019s monetary policy-setting policy - said, \u201cWe should allow the central bank to purchase a broader range of securities or assets.\u201d <\/p>\n

Currently, the Fed is only legally allowed to purchase U.S. Treasury bonds, and mortgage-backed securities issued by government-backed agencies liked Fannie Mae and Freddie Mac. Such a move beyond that would require Congressional approval.<\/p>\n

As the Wall Street Journal noted, \u201cMr. Rosengren\u2019s proposal to broaden the array of assets the Fed can buy is sure to be controversial. Fed purchases of private assets run the risk of the central bank picking winners and losers in the economy, something the central bank has long wanted to avoid.\u201d Still, under the current panic circumstances, it\u2019s hard to believe that wouldn\u2019t gain acceptance, if not wild enthusiasm.<\/p>\n

While this would certainly be not just controversial but unprecedented in the U.S., it wouldn\u2019t be the first time a central bank has done so. After all, the European Central Bank and the Bank of Japan have been buying corporate bonds and private asset-backed securities for years, while the BOJ also buys Japanese stocks - indeed, it\u2019s the largest owner of Japanese stocks.<\/p>\n

Why not the Fed?<\/p>\n

Giving the Fed the wherewithal to buy \u201cprivate assets\u201d - not just corporate bonds but stocks, too - doesn\u2019t seem far-fetched, given the Powell Fed\u2019s proclivity to intervene to stop equity market volatility. Lowering interest rates and buying up more government bonds and MBS have proven effective in the past by pushing investors into stocks. Still, this latest episode indicates that strategy may have lost its effectiveness, at least in today\u2019s market turmoil, when many people don\u2019t want to own equities. Giving the Fed the power to buy stocks would give it a more effective and direct tool to bolster the stock market. <\/p>\n

How might it work, without the Fed \u201cpicking winners and losers?\u201d That seems relatively easy. Give the Fed legal authority to buy shares in mutual funds and ETFs that buy the entire stock market, as many do, not just individual stocks or just a portion of the market, like the Dow 30 or the S&P 500. Don\u2019t play favorites \u2013 buy a little bit of everything.<\/p>\n

May it yet come to this point? I wouldn\u2019t bet against it, especially if the Fed\u2019s next rate cut proves to be another flop.<\/p>\n

Visit back to read my next article! <\/p>\n

George Yacik<\/a>
\nINO.com Contributor - Fed & Interest Rates<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Since he became Federal Reserve Chair two years ago, Jerome Powell has created a new mandate for the Fed above and beyond its \u201cdual\u201d Congressional mandate to \u201cpromote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates\u201d (that\u2019s federal government math for you). Powell has added putting a floor under stock […]<\/p>\n","protected":false},"author":16,"featured_media":51728,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[6191,9264,8524,6882,6824,511,6938,230,5383],"class_list":["post-51725","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ino-com-contributors","tag-economic-growth","tag-fed-chair-jerome-powell","tag-fed-monetary-policy","tag-federal-balance-sheet","tag-federal-open-market-committee-fomc","tag-federal-reserve","tag-george-yacik","tag-interest-rates","tag-quantitative-easing-qe"],"yoast_head":"\nWill The Fed Buy Stocks Next? - INO.com Trader's Blog<\/title>\n<meta name=\"description\" content=\"Should the Fed be allowed to purchase a broader range of securities or assets vs. U.S. Treasury bonds, and mortgage-backed securities?\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2020\/03\/will-the-fed-buy-stocks-next\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Will The Fed Buy Stocks Next? 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