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Can the Fed buy and sell stock in publicly traded companies? Is there evidence of this and, wouldn't this behavior drive the price as opposed to actual market forces?

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  • $\begingroup$ both capm and dismalscience answers added value to the question, i just accepted the first one to address it. $\endgroup$ – dnbwise Jun 2 '16 at 20:00
  • $\begingroup$ This is just my opinion...i will stay with it til proven wrong. The FED will do what they damn well please. With respect to individual stocks, they buy indexed futures and options instead of individual stocks( SPY, SPX, et al) and certain ETFs ( QLD for instance)...they also buy options on equity indexes and then let the options expire...this is all done through the 22 Primary dealers.. a Primary dealer is recognized by the FED as a conduit for implementing monetary policy. I know cause I worked for one years ago... The Flash Crash of 2010 was the FED attempting to liquidate SOME of their equi $\endgroup$ – user10083 Aug 10 '16 at 13:31
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No, the Fed is not allowed to buy stocks, they are allowed to buy government securities in open market operations in order to achieve the target rate for the federal funds rate. The guidelines for this are explained in the Section 14 of the Federal Reserve Act. You can find the Fed holdings in the Federal Reserve Statistics.

However other central banks, like the Bank of Japan, started buying stocks as a measure to support their financial institutions (their banks were subject to too much market risk because of their stock holdings). The have detailed their stock purchasing plan in their website.

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  • $\begingroup$ However, you can read in the news that another central bank is considering such a policy: Bank of Japan. $\endgroup$ – Alexis L. Jun 1 '16 at 0:57
  • $\begingroup$ I update the answer with the information provided by @dismalscience and the Bank of Japan stock purchase plan. $\endgroup$ – capm Jun 1 '16 at 15:46
  • $\begingroup$ @capm wouldn't this behavior drive the price as opposed to actual market forces? $\endgroup$ – dnbwise Jun 1 '16 at 20:04
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    $\begingroup$ @dnbwise Yes, of course it would affect the price—the implications of a government entity supporting companies' share prices (possibly in a way that favored one firm over another) is exactly why the Fed isn't allowed to do it. If you're looking for an example of what it looks like when a central bank does buy stocks, China's central bank engaged in equity market interventions last summer when their stock market was falling (I don't know whether some firms were favored over others; that would be an interesting paper). $\endgroup$ – dismalscience Jun 1 '16 at 23:19
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    $\begingroup$ @dnbwise Yes, but it depends on the objective of the central bank. In the case of the BoJ they don't want to support the price of the stocks, the want to take the risk off the balance sheets of their banks, in order to avoid volatility of their banks tier 1 capital. Like dismalscience said, in the case of the Bank of China, they openly intervened the market to avoid further crashes and loss of market cap. $\endgroup$ – capm Jun 2 '16 at 15:57
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@capm is correct that the Fed is not allowed to buy equities (though they may lend against them if need be, so long as they are secured to their satisfaction— see, for example, all the things they lent against in the Maiden Lane transactions), however, they're allowed to buy a lot more than "government securities" (i.e., Treasuries).

Section 14 of the Federal Reserve Act details what they can purchase, which includes Treasuries, GSE (i.e., Fannie and Freddie) securities (which are not legally considered to be government-backed securities, though they're often casually treated as such), gold, cable transfers, bankers' acceptances, bills of exchange, discount notes, municipal bonds, obligations of federal agencies, and (by allowing them to hold accounts at other central banks) foreign currencies.

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Is it relevant here to speak about the Plunge Protection Team (PTT) or the Working Group on Financial Markets https://en.wikipedia.org/wiki/Working_Group_on_Financial_Market? There is lots of talk that they do interfere in the broader stock market. One can also question that when a central bank like the FED prints tons of money and lends it out at 0 interest rates that money will start looking for yield... in the stock market. It's my opinion that the FED (and the other central banks around the world) reinflated the stock markets. The runup since 2009 is largely based on money printing, not on genuine 'growth': enter image description here

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  • $\begingroup$ Why is this getting downvoted? Not relevant? just a question I'm very new here... $\endgroup$ – tibo Jun 3 '16 at 14:34
  • $\begingroup$ The answer was flagged as being primarily opinion based. You could improve the quality by citing more sources and explaining your inclusion of the graph. Removing opinion based and incendiary words like "tons of money", 'genuine "growth"' (provide a measure that supports your argument i.e. wage stagnation vs. stock indices), and generally the Fed does not lend at 0, even under TARP or asset purchase strategies, they are purchasing equities and looking for growth, just not interest. $\endgroup$ – Jason Nichols Jun 30 '16 at 13:27

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