“There’s a point where the Federal Reserve is going to have to pull out a bazooka,” Minerd said in an interview. “And I think the option of buying stocks on the part of the Fed is on the table.”
Should a stock market collapse happen, it would erode confidence among consumers, small businesses and CEOs alike. And it would make it harder for companies to borrow the money they need to survive because of the strong link between stock prices and corporate credit spreads.
“The Fed has basically told us they don’t have a stomach for this,” said Minerd. He warned his clients back in February — when US stocks were rising to ever greater heights — that there were “red flags” in financial markets.
“This will eventually end badly. I have never in my career seen anything as crazy as what’s going on right now,” he wrote on February 13.
Fed unfroze credit markets
Since the pandemic began, the US central bank has rolled out a series of emergency lending programs that make its 2008-era response look tame.
Foreign central banks are already buying stocks
Buying stocks would be a significant escalation in the Fed’s mission to avoid a depression — one that would face legal obstacles.
“I frankly don’t think it’s necessary at this point,” Yellen said, “but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own.”
Some foreign central banks are already aggressively playing in the stock market.
The Bank of Japan has been buying equity ETFs for a decade and is now one of the biggest owners of Japanese stocks.