Recently, we have heard noises from several different places touching on the theme of equities purchases by the Federal Reserve. The first was during Fed Chair Janet Yellen’s most recent testimony before Congress when Rep. Mick Mulvaney asked her about the subject. She responded:
“The Federal Reserve is not permitted to purchase equities. We can only purchase U.S. treasuries and agency securities. I did mention in a speech in Jackson Hole, though, where I discussed longer term issues and difficulties we could have in providing adequate monetary policy. Accommodation may be somewhere in the future, down the line that this is the kind of thing that Congress might consider.”
During a subsequent video conference, she added:
“The idea of expanding into areas like equities might be a good thing to think about… The Fed is more restricted in which assets it can purchase than other central banks. If we found, I think as other countries did, that they could reach the limits in terms of purchasing safe assets like longer-term government bonds, it could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions.”
Larry Summers mooted the idea during a recent lecture at a Bank of Japan conference in Tokyo, suggesting that central banks should give serious consideration to the purchase of a “wider range of assets on a sustained and continuing basis.”
And finally, JP Morgan strategist Nick Panigiritzoglu wrote this in a research note last week:
“… QE need not be confined to bond instruments in our mind. By limiting themselves to bonds, central banks are indeed deemed to face quantitative constraints given declining government bond issuance even as spread product issuance has increased.”
Is it unthinkable? Not for the Bank of Japan, which has been buying Japanese ETFs for some time… and perhaps also not for the Fed, when and if the ultimate QE Blitzkrieg is deemed to be warranted.
Investment implications: Janet Yellen and Larry Summers have both suggested that it might under some circumstances be desirable for the Federal Reserve to start buying stocks. In the U.S., this would probably require action by Congress… but we are wary of saying that anything is impossible. There could be a lot further to go than you think before central banks have exhausted their ammunition.
For more commentary or information on Guild Investment Management, please go to guildinvestment.com.
