 Ask
Dr. Econ
September 2002
Does the Federal Reserve System hold stocks or other commonly traded
equities like the Bank of Japan recently started doing?
The Federal Reserve System does not hold corporate stocks, but it does
hold government securities. In 2001 government securities
accounted for a significant share of Federal Reserve System's $654 billion
in assets. The Federal Reserve's securities portfolio is composed of securities
issued by the United States government or government agencies. Securities
held by Federal Reserve Banks are obtained and traded through open market
operations.
While the Bank of Japan (BOJ) also conducts monetary policy through open
market operations, it recently announced a plan to purchase stocks from
commercial banks that fit a set of specified criteria. A subsequent analysis
in the Financial Times
explained the reason for the BOJ's decision to purchase stocks from commercial
banks: "The bank said falls in the Nikkei stock average, which dipped
briefly below 9000 last week, near its 20-year low, could threaten the
stability of financial markets and the financial system."
Security Holdings are Important to the Federal Reserve System
At year-end 2001, the twelve Federal Reserve Banks held over $560 million
in U.S. Treasury and federal agency securities. This accounted for about
86 percent of total System assets (see Chart 1). The majority of these
securities were Treasury bills, notes, and bonds. The balance of the securities
portfolio was federal agency securities issued by Federal Farm Credit
Banks, the Federal Home Loan Bank, Federal Land Banks, or the Federal
National Mortgage Association (Fannie Mae).
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Source: Annual Report, Federal Reserve
Board, 2001. Available at: http://www.federalreserve.gov/publications.htm
*Other assets include Coin, Items in Process of Collection,
Loans to Depository Institutions, and Accrued Interest Receivable.
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For more information on the Financial Statements of the Federal Reserve
System, see its Annual Report
at http://www.federalreserve.gov/boarddocs/rptcongress/annual01/default.htm.
In addition, each Federal Reserve Bank publishes an Annual Report that
details its securities holdings.
Securities Held by the Federal Reserve System are Used in Open Market
Operations
Open market operations involve the buying and selling of government securities
in order to control the money supply and to meet interest rate targets
in the federal funds market. The Federal Reserve System publication, Purposes
and Functions, describes this process in more detail and is available
at: http://www.federalreserve.gov/pf/pdf/frspf2.pdf.
Similar to the Federal Reserve System, the BOJ conducts monetary policy
by buying and selling Japanese Government Bonds (JGBs).
The Bank of Japan Proposed a Plan to Repurchase Stocks from Commercial
Banks
In September 2002, the BOJ announced that it would begin to buy corporate
stocks from troubled Japanese commercial banks that meet particular criteria
(see "The Outline of the Stock Purchasing Plan" at http://www.boj.or.jp/en/seisaku/02/sei0209b.htm).
Since the announcement, analysts have expressed both positive and negative
views about the Japanese central bank's decision.
A Wall Street Journal
article published subsequently to the BOJ's announcement stated: "The
decision by the [Japanese] central bank to buy shares in companies owned
by the banks could remove one of the most-feared triggers of the financial
crisis in Japan by cutting the link between share prices and bank capital.
However, Bank of Japan Gov. Masaru Hayami has long restricted calls for
the bank to combat price deflation by buying unconventional assets such
as stocks or bad loans, arguing that such tactics could destroy the credibility
of the nation's lender of last resort."
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