The Federal Reserve is reportedly considering unprecedented steps to support the U.S. equity market, potentially including buying equity exchange-traded funds (ETFs) to stabilize stocks during a bear market. This shift would mark a significant departure from the Fed’s traditional approach and respond to the immense political and economic pressure to shield a market that underpins a substantial portion of American wealth.
The U.S. equity market, valued at approximately $75 trillion, has surged by over 60% in the past five years. Despite this expansion, concerns rise among some experts about an impending correction after years of rapid growth. Bloomberg ETF specialist Eric Balchunas suggested the Fed may break with decades of precedent by stepping in as a buyer of last resort for equity ETFs, akin to its previous intervention in corporate bond ETFs during the 2020 COVID-19 crisis, when it purchased nearly $9 billion worth of those funds to restore frozen credit markets.
Balchunas stressed that with over half of American households owning stocks, the political stakes for preventing a prolonged decline are substantial. The Fed’s involvement could become routine in future downturns, mirroring practices already seen in central banks in China and Japan, which support equity markets through indirect ETF purchases. This prospective intervention aligns with ongoing expansive monetary policy trends marked by increasing liquidity and debt accumulation, particularly in the U.S.
Market watchers also point to the broader impact such Fed actions could have on cryptocurrencies. Alvin Kan, COO of Bitget Wallet, framed previous episodes where Fed intervention correlated with a medium- to long-term uptrend in digital assets. He highlighted how increased liquidity and renewed risk appetite typically encourage capital to flow into higher-risk investments, including crypto, as observed in 2021.
However, crypto’s link to central bank policies remains indirect. Tim Sun, senior researcher at HashKey Group, noted that while cryptocurrencies will not receive explicit central bank backing, their value closely tracks U.S. dollar liquidity, interest rates, and overall market risk sentiment. A sustained bear market carries risks beyond asset price declines, potentially weakening consumer spending, pension funds, corporate credit growth, and tax revenues. Should the Fed establish a credible policy floor for risk assets, this could lower the risk premium investors require, fostering improved conditions for both equities and high-beta assets like cryptocurrencies.