Will the Eccles Building turn into an investment house? Will the Federal Reserve be rebranded Powell & Associates? Will the central bank buy and sell stocks? After pulling the trigger on the mother of all monetary stimulus measures in the form of unlimited quantitative easing, the only thing left for the Fed is to install traders on the New York Stock Exchange. While adopting subzero interest rates is likely the next major policy maneuver, the Fed might take a cue from China and Japan and be inspired to purchase shares in Boeing, United Airlines, and Exxon Mobil. It decided to buy corporate bonds for the first time in its century-long history, so why not become a shareholder, too? What a difference 100 years make!
Powell & Associates
Now that the federal government has adopted equity stakes in the airlines, is it safe to assume that the Fed will start scooping up stocks? The central bank has not directly commented on the possibility. However, Boston Fed Bank President Eric Rosengren thinks the Fed needs to broaden the types of assets it can purchase to support the economy.
This has many Wall Street experts thinking that buying stocks could be the next bullet fired if the economy does not improve or the financial markets suffer another serious setback. Quincy Krosby, the chief market strategist at Prudential Financial, made an important observation in an interview with CNBC: “Everything is on the table now that was not even a potential six weeks ago.”
In 2008, who would have thought the Fed would expand the balance sheet by $4 trillion or bail out foreign banks? On New Year’s Eve, did anyone think the Fed would begin buying corporate bonds?
Should the Fed become an investor, it might need congressional approval to extend its mandate. However, as we have witnessed in recent weeks, the Fed has been given considerable latitude from the Treasury Department through the emergency provisions inside the Federal Reserve Act. Since most lawmakers do not have a clue about how the Fed operates, and many Americans pay attention more to the fiscal side of policymaking than the monetary arena, the Fed has carte blanche to do whatever it wants.
The market may have bottomed out on March 23, the volatility on the leading indexes appears to have subsided, and the daily 1,000-point swings are not as ubiquitous. Overall, the Eccles Building might have stabilized markets, which means it may not need to pick stocks. Not yet, anyway.
The Fed would not be the first central bank to trade stocks. Many of these entities have become shareholders on their respective stock exchanges to spur growth and keep zombie companies alive.
In April 2019, the Bank of Japan (BoJ) became a top-ten shareholder in 50% of stocks trading on the Nikkei. Haruhiko Kuroda’s BoJ holds more than $250 billion in exchange-traded funds (ETFs), and it is ramping up its annual asset purchases to $119 billion. The People’s Bank of China (PBoC) has been bailing out state-owned enterprises for years, making it a quasi-stakeholder in operations.
Central banks are even investing in foreign stock markets. The Swiss National Bank (SNB), for instance, has invested $80 billion in U.S. stocks to suppress the appreciation of the franc. Since 2016, the SNBC has increased its shares in American tickers by 30% – and it keeps climbing.
It has become so crazy out there that investment firms are recommending investors to buy whatever the Fed is buying. In this case, the Bank of America suggests investing in corporate debt because the Fed is doing so. The financial institution recommends touching iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund, which has jumped about 13% since the Fed’s announcement.
Analysts are justifiably warning about central banks distorting equities. Their consternation makes sense because these institutions have unlimited resources at their disposal, unlike professional and retail investors. What would prevent the Powell Putsch from buying billions of dollars’ worth of ETFs exposed to the S&P 500 or mutual funds specialized in the financials?
Beyond the Mandate
Anytime somebody says the fundamentals of the U.S. economy or stock market are sound, the only reasonable response is to point and laugh. There is no way anybody could pontificate with a straight face that the underlying fault lines are stable. If they were in great shape, you would not need a central bank to acquire private-sector bonds, scoop up Treasurys, or potentially become a shareholder. Ultimately, these policies will generate a plethora of unintended consequences, bubbles, and moral hazards that will be nearly impossible to eradicate once we return to some semblance of normalcy. Wait a minute. Normalcy? What is that?
Read more from Andrew Moran.
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