Dr. Econ

Can the Fed conduct monetary policy through the purchase and sale of stocks on the New York Stock Exchange?

November 2005

The Federal Reserve implements monetary policy decisions through the buying and selling of securities (held in the System Open Market Account, or SOMA) on the open market desk at the New York Fed. These transactions serve to adjust the cost and availability of money and credit in the U.S. economy.

Some of the world’s central banks (including the Bank of Japan) 1, do in fact hold assets such as public stocks, but the Federal Reserve does not. The September 2002 Dr. Econ article discusses whether the Federal Reserve holds stocks or other commonly traded equities and describes the Fed’s portfolio of assets—primarily U.S. Treasury bills, notes, and bonds. 2

The above source discusses whether the Fed does buy and sell commonly traded securities. The question of whether the Fed should buy and sell commonly traded securities is discussed in great detail in “What Assets Should the Federal Reserve Buy?” written by the President and Senior Vice President at the Federal Reserve Bank of Richmond (Broaddus and Goodfriend 2001).

This paper considers which assets the Fed could purchase if the national debt were paid off and Treasury securities were no longer an option for Federal Reserve asset portfolios. 3 It also discusses potential ramifications of the Fed holding certain assets, as well as a historical perspective on this issue.

The authors generally conclude that there would be significant risk, conflict of interest, and political challenges if the Fed were to purchase assets such as commonly traded securities.

“[W]e argue that the Fed’s asset acquisition policies should support monetary policy by protecting the Fed’s independence. We assert two closely related principles. First, the Fed’s asset acquisitions should respect the integrity of the fiscal policymaking process by minimizing the Fed’s involvement in allocating credit across sectors of the economy. Second, assets should be chosen to minimize the risk that political entanglements might undermine the Fed’s independence and the effectiveness of monetary policy.” (p. 8)

Additionally, when thinking about this question it is important to keep in mind that the objectives of the System Open Market Account are “to minimize risk, maximize liquidity, and remain market-neutral in order to manage reserve balances and provide collateral for Federal Reserve Notes.” 4

NOTE: On November 25, 2008, in the height of the financial crisis the Federal Reserve announced that it would begin purchasing up to $100 billion in agency debt and up to $500 billion in agency mortgage-backed securities. Since that time it has announced several other large-scale asset purchase programs. For a more recent discussion of Fed Balance Sheet trends, please see "The Evolving State of the Fed’s Security Holdings," from the Cleveland Fed.


Footnotes

1. See Bank of Japan (2002).

2. See the Federal Reserve’s current assets in the weekly H.4.1. release.

3. Dr. Econ also discussed the possible effects of paying off the national debt in August 2000

4. Federal Reserve Bank of New York, “Fedpoints.”

References

Bank of Japan. 2002. “The Outline of the Stock Purchasing Plan,” October 11.

Broaddus, J. Alfred, Jr., and Marvin Goodfriend. 2001. “What Assets Should the Federal Reserve Buy?” Federal Reserve Bank of Richmond Economic Quarterly. 87(1) (Winter)