Amid Fed chairperson Janet Yellen’s testimony before the House Financial Services Committee yesterday, South Carolina Republican Mick Mulvaney asked very directly about the cartel’s potential to buy stocks to prop up the economy. Mulvaney said:
“There’s been some attention in the last few months about the recent decision by the Bank of Japan to start purchasing equities and my question to you is fairly simple. Is the United States Federal Reserve looking at the possibility of adding the purchase of equities to its tool box as it looks at monetary policy?”
Most Fed-watchers would have expected Yellen to deflect the question, or to simply say “No.” But then, Ms. Yellen dropped a bombshell with her response:
“Well, 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, but if you were to do so, it’s not something that the Federal Reserve is asking for.”
So there you have it. The Federal Reserve has clearly been internally discussing the possibility of buying equities, and has now laid out exactly how Congress could permit it to do so.
Just ten years ago, the mere suggestion of the Federal Reserve buying stocks would have been laughed off. But in this post-crisis era, the rules have changed, and the groundwork has begun for the Fed to do just that.
The practice is already being used in Japan, where central bankers recently boosted their purchases of exchange traded funds. The Bank of Japan has already spent hundreds of billions to date buying equities, but its extreme policies haven’t been enough to spur the economy to meet its goals.
The Wall Street Journal speculated this month that the practice could soon spread to Europe as well, as the ECB considers any and all measures to stabilize the region. Buying stocks could become a “necessity” for the European Central Bank, because it’s actually running out of bonds to buy.
Here in the U.S., we’re supposed to set a higher standard.