According to a research report released last week by BNY Mellon in collaboration with the University of Cambridge's Judge Business School, 39 percent of central banks surveyed are now investing in stocks and 72 percent "reported use of derivatives as part of their investment management activities." It is likely that interest rate swaps are the more common derivatives being used by central banks. However, S&P 500 futures contracts are also derivatives and would be the most efficient means of propping up stock prices and/or leveraging a directional bet in stocks.


There are many fundamental reasons to distrust central banks meddling in what are supposed to be free markets. For one thing, U.S. securities laws and regulators are not set up to police central banks. But more importantly, with the power to create money out of thin air, what is to stop central banks from effectively becoming the stock market, killing off its very reason for existing: as a reliable pricing mechanism. Just as the central bank of Japan has boosted its stock market with a $50 billion a year stock purchase program and Switzerland and Israel keep ratcheting up the percentage of reserves they are committing to stocks, the central banks may have doomed themselves and the stock market by failing to address the most crucial part of this strategy: an exit plan.

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