Could Fed change money supply by buying or selling stocls in NYSE? Any drawbacks?

Answer 1

The way they change the money supply is by buying and selling government bonds. Works just as well if not better.

Answer 2

Lots of drawbacks with no advantages. The Fed could buy and sell anything really, but you would want to have an idea of the distortions you would create.

For example, lets assume the Fed only bought or sold the Dow. They would then need to keep a permanent inventory since there would be nothing to sell. This would permanently shift the price of the Dow upward, regardless of the economic value of the Dow.

However, after this occured, lets imagine the Fed wants to tighten the money supply so it sells the Dow. Stocks are quite illiquid. Even the Dow isn't that liquid so a .25% rate hike would be a $10 billion dollar sale of the Dow. That is about 5 times the volume of the DIAmonds trust which tracks the Dow. Every time the Fed wanted to shift policy, it would crash the market or cause a boom. If it did it slowly, then it would create a momentum bubble.

The stock market is about 1/10th the size of the bond market and has less capacity to absorb money.

Further, how would the Fed vote in shareholder issues? Would congressmen be able to pressure company presidents with Fed shareholdings?

Finally, stocks are residual claims whereas bonds are first claims. The Fed, and ultimately the Federal government, would have a self interest in pay levels of shares it owns, prices of commodities, goods and services, health care benefits provided by its "subsidiaries," and so forth. Whereas Treasury bonds are diffuse claims on the entire voting republic.

Finally, there is one more reason and it is paramount.

A dollar bill is a non-interest bearing debt of the government to the people. When the Fed adds money it does so by swapping interest bearing debt of the government for non-interest bearing debt of the government. When it removes money, it trades non-interest bearing debt for interest bearing debt. It constrains the fiscal policy by its choices. A congress paying fewer payments to the public is less constrained than a congress paying more interest payments to the government.

Using stocks, the government is swapping non-interest bearing debt in exchange for productive assets that were otherwise privately owned. A failure of those assets to produce would have the same effect as the Treasury defaulting on its debt.

Answer 3

Nope. I have not seen them doing it.

The Biggest and the most powerful action they have taken is by adjusting the interest rates.