The U.S. central bank has not shied away from doing whatever it can to help stabilize incredibly volatile financial markets in the face of the novel coronavirus pandemic, but will the Federal Reserve buy stocks?
“You better grab some SPY and DIA ETFs before Powell does.”
The Fed has already greatly ramped up its efforts to keep the economy rolling using a variety of measures, including as much quantitative easing as needed to keep liquidity in the markets and the buying of corporate bonds. But the Fed has never stepped straight into the stock market to buy riskier equities.
While it would need congressional approval to extend operations to stock purchases, many analysts don’t think it’s completely out of the question. Prudential Financial Chief Market Strategist Quincy Krosby thinks that “if there were any major dislocations, it is clear that they will go into whatever nook and cranny in the market that starts to choke.”
“We know that when you have choking in one part of the market, you have choking in another part of the market that leads to dislocation, Krosby added. “As soon as you cross that line, you are now facing something else that you could conceivably buy.”
Some Fed officials have already floated the idea of taking a deeper dive into financial markets.
“We should allow the central bank to purchase a broader range of securities or assets,” Boston Fed President Eric Rosengren said during a March 6 meeting of the Shadow Open Market Committee. The SOMC is a group of economists who track Fed activity.
So it may be more a question of “when” instead of will the Fed buy stocks?
Will the Federal Reserve Buy Stocks?
If the Fed ramps up its efforts and decides to purchase stocks, it would likely happen in the exchange-traded fund market that is valued around $3.6 trillion, according to CNBC. That’s because ETFs are passive in nature, and follow indexes instead of individual stocks.
Just like other sectors of the financial markets, ETFs have witnessed a mass exodus out of popular funds.
The iShares Core S&P 500 ETF (NYSEARCA: IVV), which is highly exposed to large-cap stocks, lost around 1/3 of its value after investors pulled $5.2 billion out of the fund over the last month. Its current market cap is around $11.8 billion, and Krosby warns that “another major round of redemptions” could draw the attention of the Fed.
“Everything is on the table now that was not even a potential six weeks ago,” he added.
He thinks the threat of action by the Fed may be enough, likening it to an all-too-familiar tactic used by overbearing parents everywhere: the “three-count system.”
“Did your parents have a three-count system to command you back into the house? For those of you who grew up with Italian American mothers, you know exactly what I’m talking about,” King, editor of
“It’s the rhetoric of counting to three that matters, not the action when you get to three.”
But King wonders if the Fed’s three-count system is “overused and worn out.”
“Are the Fed’s actions and their talk still credible and believable? They can announce the purchase of government bonds and bonds rally before a single dollar is committed. They can do the same thing with mortgage bonds, corporate bonds, municipal bonds and commercial paper. They can even do the same thing with stocks.
“The question is whether or not investors believe they’ll actually do it. And we have no reason to believe they won’t.”
King said he doesn’t know what the repercussions would look like if the Fed’s three-count system loses credibility, but he isn’t willing to bet the Fed has reached that point yet.
He quipped that the potential move by the Fed into ETFs could be a unique buying opportunity of popular funds like the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA) or the SPDR S&P 500 ETF Trust (NYSEARCA: SPY).
“You better grab some SPY and DIA ETFs before Powell does,” King said.