For nuclear, read “stocks.”

It’s not at all unimaginable that the Fed could wade (further) into uncharted waters and mop up stocks. According to market experts, if the coronavirus leads to more panic and deterioration in the markets, the Fed will not hesitate to buy up stocks on a scale large enough to restore order. (CNBC)

Given the present mood of the Fed, it may bring out the heavy artillery via purchases of stock ETFs. Though the move would require Congressional permission, it would likely implement the measure without much difficulty.

The Fed has already taken a series of fire-fighting measures to soothe corona-panicked markets. These include cutting rates to near-zero, buying up corporate and muni bonds, and an “all-it-takes” QE program. These measures might have been inconceivable a few weeks ago.

A fresh tsunami of redemptions may be the trigger

Intervention on this unprecedented scale may yet prove to be inadequate. If investors embark on another selling spree via fund redemptions of stocks, the Fed may have to step in again.

The markets are intensely volatile and reacted to the Government’s $2 trillion stimulus package with another selloff on Friday. The iShares Core S&P 500 ETF (NYSEARCA: IVV), a popular large-cap stock ETF, fell 3.1%.

If things worsen, the Fed may have to follow the Bank of Japan’s modus operandi.

Get creative, follow the Japanese

Analysts warn that the Fed may be forced to intervene if a liquidity crisis morphs into a solvency crisis.

Then it may need to borrow a page out of the Bank of Japan’s stock ETF playbook. The BOJ has been buying stock ETFs for years, and now holds 80% of equity funds. Earlier this month it announced it will boost stock ETF purchases to $110 billion annually.

“That would be new territory for the Fed, not that they’re scared of new territory,” said Lindsey Bell, chief investment strategist at Ally Invest.

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