More confirmation that the Fed is never out of ammo

Market monetarists knew this all along:

Should conditions on Wall Street deteriorate significantly, the central bank could go where it’s never gone before: to passively intervene in the stock market for the first time ever, according to market analysts and economists.

. . .  The Fed would need congressional permission to extend its operations, but it already has received wide latitude from the Treasury Department through emergency provisions in the Federal Reserve Act.

“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,” said Quincy Krosby, chief market strategist at Prudential Financial. . . . Indeed, the Fed already has shown a willingness to go beyond its financial crisis response, and it may have to do more if the crisis worsens.

As the economic fallout from the pandemic spread earlier this month, Boston Fed President Eric Rosengren already was saying the Fed may need to broaden the types of assets it can buy to support the economy.

It’s fine if people want to keep talking about fiscal stimulus.  But don’t pretend it’s justified by the Fed running out of ammo.

PS. As I’ve said repeatedly, I’m in favor of Congress giving the Fed permission to buy corporate stocks and bonds, and I oppose the actual purchase of those assets.  Instead, I’d pursue level targeting.

HT:  David Beckworth



22 Responses to “More confirmation that the Fed is never out of ammo”

  1. Gravatar of tmx tmx
    30. March 2020 at 10:43

    Interestingly – getting them to buy into the stockmarket may do some good for the animal spirits.

    People unduly look at the stock market so maybe the fed should too!

    Investors that need cash rather than stocks could sell them to the fed – who is like a buyer of last resort. When things turn around the fed can resell those and take the hit on the companies that went out of business. If the purchase was made with created money, this is basically inflation and essentially comes from savers – there’s some overlap with those people that held the stocks in the first place.

    By definition the poor have less savings so this could be tolerated.

    It might be easy to game but the fed would need to stay vigilant to what they should and shouldn’t purchase – as you said they should have the freedom to, and then individual purchases can be opposed.

  2. Gravatar of ssumner ssumner
    30. March 2020 at 12:05

    tmx, I don’t see any need to extra liquidity in the stock market today. People can sell their stocks right now if they need cash.

  3. Gravatar of Ray Lopez Ray Lopez
    30. March 2020 at 12:06

    Another excellent post by Sumner, two in a row. Perhaps, if the Fed is indeed intervening in the US stock market, it explains why the market has rallied so quickly since the March 15 Fed QE-infinity announcement. Maybe there’s something to money illusion after all, if the Fed can ‘engineer’ a correction to the bear market and make stock holders feel ‘rich again’? People are basically stupid (C. List comes to mind) so perhaps money illusion is indeed real.

  4. Gravatar of Christian List Christian List
    30. March 2020 at 13:03

    Ray on the double buttlicker course. That sure is funny. And he admits that Scott’s views on monetary neutrality are correct. Ha ha.

    But for the first time he forgot to mention how rich he is supposed to be. Well, that’s yet to come.

  5. Gravatar of Michael Sandifer Michael Sandifer
    30. March 2020 at 15:07


    Do you care to comment on this Nick Rowe Twitter three?

  6. Gravatar of Michael Sandifer Michael Sandifer
    30. March 2020 at 15:08

    Thread, not three

  7. Gravatar of Benjamin Cole Benjamin Cole
    30. March 2020 at 15:33

    One curiosity of modern macroeconomics is that there does not appear to be agreement on whether the Federal Reserve is now, in fact, engaging in helicopter drops.

    Michael Woodford, Columbia University econ professor with all the credentials one could possibly want, wrote an article for Vox indicating he believed that when a federal government runs deficits and the central bank purchases Treasuries, that meets the definition of a helicopter drop.

    David Beckworth has indicated rhat additions to the central bank balance sheet need to be considered permanent to be effective. Beckworth also wants the Federal Reserve to engage in helicopter drops.

    Stanley Fischer, an experienced central banker with towering academic credentials, contends the Federal Reserve must respond to a recession, in current circumstances, with helicopter drops, but left the definition of helicopter drops rather fuzzy. Fischer advocates a “fiscal facility” within the Federal Reserve.

    It seems to me that conventional quantitative easing is a helicopter drop, but on Wall Street, and is rather weak tea for stimulating aggregate demand within the United States. How will injecting $2 trillion into globalized capital markets increase aggregate demand within the United States?

    Conventional quantitative easing may be worthy for certain goals, such as stabilizing financial markets, but the connection to increase in aggregate demand within the US seems rather slim.

    So is the Fed out of ammo in the present circumstances, as argued by Stanley Fischer?

    If Chairman Powell would indicate that additions to the Federal Reserve balance sheet are permanent, then perhaps it would not be out of ammo as long as the federal government ran large fiscal deficits.

    However, it may not matter what Chairman Powell says, because no one believes the Federal Reserve will shrink its balance sheet in the future anyway. I don’t.

  8. Gravatar of Kevin Kevin
    30. March 2020 at 18:29

    Scott right now the Fed seems to be intervening on the fly wherever markets are mechanically breaking down. Hence they buy money markets, commercial paper, corporate bond ETFs, mortages etc.

    While I applaud the appropriate loosening (or rather less tightening?) of monetary policy, I am concerned about the real implications. Buying non-govt bonds is hardly a neutral decision: it’s simultaneously an instrument of monetary policy and indirectly a give-away to corporations who issued the bonds. Small and medium businesses do not issue corporate bonds, commercial paper or any securities the Fed would ever buy, which places them at a disadvantage in the capital markets.

    Do you think if the Fed simply targeted NGDP expectations through a “whatever it takes approach” via Treasuries, it would eliminate the need to intervene outside the Treasury markets? I like you would prefer a world where the Fed has power to buy corporate bonds but never actually does so. However, I am unsure if that world is possible anymore.

  9. Gravatar of Esteban Esteban
    30. March 2020 at 19:09


    I believe the Fed already has a level target of 2%. For what reason do you think they don’t?

  10. Gravatar of Llamado Llamado
    30. March 2020 at 19:43

    “ is clear that they will go into whatever nook and cranny in the market that starts to choke,”

    The above suggests they are prepared to intervene in inefficient markets but what about the effects broader Fed intervention could have on more efficient markets? (or efficient segments of markets) Simply: are they likely to break things that aren’t broke?

    Matt Levine has a piece that mentions an emerging problem the Fed purchasing bonds tied to MBS is having for mortgage lenders: (HT Dallman Ross AKA Bearcharts)

    “The idea is that when a mortgage lender makes a loan, it will lock in its interest rate by selling mortgage bonds. (It gets long a mortgage in the primary market, by lending, so it gets short an offsetting mortgage in the mortgage-backed-securities market.) That way it should have no interest-rate risk as the mortgages it makes move through the pipeline, being packaged up and put into securities and sold…

    …When mortgage bonds go up in value, the lender has to come up with cash for its short immediately. When the lender’s loans go up in value, no one gives it any extra cash that day; it has to wait until it finishes packaging and selling them.”

  11. Gravatar of Ray Lopez Ray Lopez
    31. March 2020 at 00:05

    @Esteban – “Scott, I believe the Fed already has a level target of 2%. For what reason do you think they don’t?” – lol, a poor troll post as Sumner doesn’t even mention 2% in this post. Endless September theme.

  12. Gravatar of Benjamin Cole Benjamin Cole
    31. March 2020 at 00:18

    “Unemployment could top 32% as 47M workers are laid off amid coronavirus: St. Louis Fed”–USA Today.

    Um. The kind of ammo the Fed will be using soon will be live and around their headquartersto disperse mobs?

  13. Gravatar of Benjamin Cole Benjamin Cole
    31. March 2020 at 01:47

    Sales plummeted a record 44 per cent in February, official year-on-year figures revealed on Tuesday, as the coronavirus crisis hammered Hong Kong retailers.–SCMP

    You really want to sustain the lockdowns?

  14. Gravatar of BB BB
    31. March 2020 at 04:50

    Sorry to change the subject but I’ve been curious about something for a few a previous post I think you were opposed to giving Americans checks as part of the bill. You seem to be in favor of expanded UI, what’s the distinction for you that makes one worthwhile but not the other?
    My personal view is in a time like this the Fed should do “stimulus” and Congress should enact measures that lessen human suffering and/or maintain essential services, which to me UI and cash checks both accomplish.

  15. Gravatar of Jason Jason
    31. March 2020 at 08:43

    Still believe the numbers from China, Scott?

  16. Gravatar of Jason Jason
    31. March 2020 at 08:45

  17. Gravatar of Jason Jason
    31. March 2020 at 08:54

    It’s the ChiComs fault Scott.

  18. Gravatar of ssumner ssumner
    31. March 2020 at 13:14

    Michael, I don’t have a strong view; his interpretation seems plausible.

    Kevin, This is a complex question. With level targeting, I think they could get by with 100% safe assets. If not, then it becomes a lesser of evils question. The “subsidy” factor can be reduced if they promise to sell the risky bonds as soon as the crisis is over–presumably in no more than a year.

    Esteban, Because they don’t act like they do.

    Llamado, Unfortunately I’m not qualified to answer that question. I’ll try to look into and find more information.

    BB, Checks to the unemployed reduce suffering; checks to families making $150,000 with stable jobs and a falling cost of living do not.

    Jason, You’re a bit late to the party.

  19. Gravatar of msgkings msgkings
    31. March 2020 at 13:22


    It’s checks to people making $150K….and also everyone making less, which includes the unemployed. Where would you put the cutoff? Some family barely making ends meet making $50K/year could really use the help. And this will help increase inflation.

  20. Gravatar of ssumner ssumner
    1. April 2020 at 09:07

    msgkings, I don’t see your point. Are you just arguing for more redistribution in general, not related to this crisis? Fine, then make that argument. I’d probably support it. But I don’t see where a crisis that reduces people’s cost of living also creates a need for income transfers to those who have jobs.

    I honestly don’t see what’s motivating the call for these transfers. And yes, have a $50,000 cutoff if you decide to do the program, those are the ones who need it most.

  21. Gravatar of Kevin R Kevin R
    2. April 2020 at 05:56

    Hey Scott!
    I’ve been heartened to see the Federal Reserve doing a much better job this time around; if you step back and look at both this and the previous recession, the ratio of talk about the zero lower bound vs. what the Fed is still more than capable of doing is off the charts this time.
    In my opinion, your ideas, clear explanation and influence have been a major part of this development, along with other market monetarists as well as signal boosters like Tyler Cowen.
    One narrative that I hope merges from this crisis is that while there is a “real-life” obstacle preventing economic activity this time, in the 2008 recession there was no such obstacle, and if had maintained a normal level of spending, the recession would have been mostly contained to its original sectors. Perhaps people will be able to see that more clearly now by way of comparison.
    Lastly, does this chart say as much as I think it says? It seems to indicate that since November/December, the level of the market has been almost entirely determined by inflation expectations. I’d love to hear your thoughts!

  22. Gravatar of Kevin R Kevin R
    2. April 2020 at 06:00

    This is the chart, bad FRED link the first time.

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