In principle, could the Federal Reserve conduct monetary policy through the purchase and sale of stocks on the New York Stock Exchange? Do you see any possible drawbacks to such a policy?
"In open market purchases, the Federal Reserve buys government bonds from the private sector" (O'Sullivan & Sheffrin, 2006, 646). This increases the money supply. "Each bank must keep an account with the Fed containing both its required and excess reserves. The check written against the Federal Reserve increases the bank's total reserves, essentially giving it more money to loan out" (O'Sullivan & Sheffrin, 2006, 647).
"In open market sales, the Federal Reserve sells government bonds to the private sector" (O'Sullivan & Sheffrin, 2006, 646). Open market sales will decrease the money supply. If the Federal Reserve sells government bonds to someone, that person will pay for the bonds with a check drawn on his or her bank and give this check to the Federal Reserve. The bank must either hand over the money in cash or reduce its total reserves with the Federal Reserve by that amount (O'Sullivan & Sheffrin, 2006).
Although bond interest rates are usually low, they are safe in promising to pay some money in the future. "If you own a bond, you are entitled to receive payments on it at a later time" (O'Sullivan & Sheffrin, 650).
This means of monetary policy would be achievable in the New York Stock Exchange. The government could sell stocks to the private sector, therefore, decreasing the money supply. The government could also buy stocks from the pr ...