The COVID-19 pandemic is wreaking havoc on Wall Street and former Federal Reserve Chairwoman Janet Yellen said she may have a solution. Yellen has suggested that although the Federal Reserve doesn’t need to buy equities now, Congress might want to reconsider letting it own assets.
“I frankly don’t think it’s necessary at this point…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,” Yellen told CNBC.
Yellen pointed out that the Fed is only allowed to own government debt and agency debt with government backing. The central bank has received special powers during the coronavirus crisis to buy other assets such as corporate debt via exchange-traded funds, CNBC reported.
The Federal Reserve has been doing what it can to support markets and the economy during the pandemic, experts say.
“Interest rates have been taken to zero, and unlimited quantitative easing or QE (money printing) is in effect. The central bank then raised the ante with daily trillion-dollar engagements in repo markets, and its QE program is growing its balance sheet by about $625 billion per week,” The Street reported.
Additionally, the Fed started buying “risk assets” or securities that carry no such federal guarantees. Plus it will soon begin acting like an actual bank for small business via the Main Street Lending Program.
This is what the Fed is allowed to do, but Yellen wants it to be able to do more.
It can buy stocks directly through some “creative financial engineering.”
Officially, the Treasury is the one making the purchases with the assistance of BlackRock (which claims to be the world’s largest asset manager with $7.4 trillion in assets under management as of end-Q4 2019) through special purpose vehicles financed by the Fed. By doing this, the Fed is essentially acting as banker to the Treasury. And the Treasury is using BlackRock as its broker “to carry out the effective nationalization of parts of markets,” The Street reported.
Allowing the Fed to buy stocks directly would be a drastic move.
As The Moguldom Nation founder Jamarlin Martin recently tweeted: “Well, someone will need to replace buybacks & hold up the house of cards. I could see Pelosi & Schumer supporting the Fed buying Facebook, Amazon, Apple, Netflix, & Google shares in a ‘backdoor bailout.’ Fed is going to get FAANG’d Up b/f this is over.”
Listen to GHOGH with Jamarlin Martin | Episode 70: Jamarlin Martin Jamarlin goes solo to discuss the COVID-19 crisis. He talks about the failed leadership of Trump, Andrew Cuomo, CDC Director Robert Redfield, Surgeon General Jerome Adams, and New York Mayor de Blasio.
“FAANG” is an acronym for the stocks of five major American technology companies: Facebook, Amazon, Apple, Netflix; and Alphabet (Google), according to Investopedia.
With a combined market capitalization of more than $4.1 trillion, FAANG companies are among the largest in the world.
Yellen’s suggestion isn’t unprecedented. Other central banks around the world, such as the Bank of Japan, have been “purchasing some of their countries’ stocks to mitigate the recent carnage sparked by the coronavirus outbreak,” CNBC reported.
“The Fed…is far more restricted than most other central banks,” Yellen noted. “Even with respect to owning corporate debt, the Fed is not allowed to directly own corporate debt and most other central banks are.”
