Liquidity.

With Sequoia Capital talking about “the Black Swan of 2020” and Bridgewater founder Ray Dalio musing upon a “once-in-a-hundred years” event, people are searching high and low​ for ​evidence of what ​officialdom really thinks​​. Not what Larry Kudlow​ says to keep the boss happy, but what the most serious and experienced “governors” of the US economy ​say when they talk to each other.

As luck would have it, we got just that today, courtesy of The Wall Street Journal:

Federal Reserve Bank of Boston President Eric Rosengren said on Friday the U.S. central bank may need the power to buy a broader array of bonds to provide stimulus given the sharp and historic decline in Treasurys yields amid the coronavirus outbreak.

He said the declines in U.S. government debt, most notably in the 10-year note, means that if the Fed runs out of room to lower rates, it also faces a very strong chance that Treasury bond buying — which featured prominently in the financial crisis and its aftermath as a stimulus tool — won’t provide much of an economic boost either.

“There would be little room for the Federal Reserve to lower rates through large purchases of long-term Treasury securities — like it did to make conditions more accommodative in and after the Great Recession — if a recession occurred in this rate environment,” the official said in the text of a speech for delivery at the gathering of the Shadow Open Market Committee, a group that weighs in on central bank issues, in New York. He did not offer a prediction for the path of monetary policy.

In such a situation, the Fed may need the ability to buy securities beyond the Treasury, mortgage and agency debt it can now hold. “We should allow the central bank to purchase a broader range of securities or assets,” Mr. Rosengren said.

The key sentence from the above is the last one: “In such a situation, the Fed may need the ability to buy securities beyond the Treasury, mortgage and agency debt it can now hold.” Under Dodd-Frank, the Fed currently does not have that ability. So legislation would be needed to make it possible..

Imagine for a moment that legislation wending its way through​ Maxine Waters’s House Financial Services Committee and Mike Crapo’s Senate Banking Committee. Imagine the subsequent negotiations between the White House and the Congressional leadership on the exact language in the legislation. It’s a scenario unlikely to “build confidence” in financial markets.

Mr. Rosengren’s speech isn’t some blogpost he felt he had to share with a wider audience. It’s a speech he will deliver “at the gathering of the Shadow Open Market Committee, a group that weighs in on central bank issues, in New York.”

And the speech wasn’t handed to a Wall Street Journal reporter because Mr. Rosengren likes to see his name in the paper. It was (prominently) placed in those pages because it would reach all of the various audiences who needed to hear the message.

The message is this: If there is a liquidity crisis in the credit markets, which there may well be, the Fed ​​will need the ability to buy stocks (liquid assets) to prevent a market crash.