Meyer Urges Federal Reserve to Add Corporate Bonds, Stocks to Portfolio
October 15, 2001
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
WASHINGON--The Federal Reserve should
consider adding corporate bonds and stocks to its
portfolio of securities when the supply of Treasury
bonds dwindles, Fed Governor Laurence Meyer
said.
The Fed controls the money supply and interest
rates primarily by buying and selling Treasury
securities, both permanently and temporarily. Should
budget surpluses result in a much smaller supply of
Treasury securities, Mr. Meyer said in a speech in
Philadelphia, the Fed's permanent portfolio of
securities should consist of "a slice of the same
assets held by the private sector. We might think of
this portfolio as one large index fund, with all private debt, equity, and other financial claims represented
in proportion to their outstanding stocks."
Mr. Meyer acknowledged holding stocks would give the government "ownership rights over private
businesses," but suggested holding only corporate bonds would distort capital markets by favoring debt
over equity financing. He said a mutual fund might be asked to manage the portfolio "under some strict
guidelines, related to appropriate indexing and asset quality." This would also distance the Fed from a
management role in the companies whose stock it owns, he said.
For the Fed's temporary operations, Mr. Meyer suggested accepting a broader range of collateral than
at present. In addition to Treasurys, the Fed now accepts as collateral bonds and mortgage-backed
securities issued by mortgage lenders Fannie Mae and Freddie Mac. But Mr. Meyer said holding their
debt and not other private assets would "reinforce the market perception of the special status of federal
agency debt," which would "increase the subsidy that already exists in this market, potentially further
distorting the allocation of credit and resources."
The FOMC has asked Fed staff to explore what additional assets the Fed might use as the supply of
Treasurys dwindles, although the urgency has decreased given that a sharp shrinkage in the surplus this
fiscal year, and possible return to deficits, has delayed the point at which the federal debt is retired.
Among the options Fed officials have disclosed are holding securities issued by lender Ginnie Mae,
which are fully backed by the Treasury, foreign government debt, and municipal securities. They have
not previously explicitly suggested corporate bonds or stocks. Mr. Meyer said he was speaking for
himself, rather than for the Federal Reserve Board or the FOMC.
Write to Greg Ip at greg.ip@wsj.com
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