I’ve often argued that Fed policy should not try boost equity prices. It’s (at least) equally true that the Fed should not try to reduce equity prices. Not everyone seems to agree:
Sharp stock-market losses show investors have got the message that Jerome Powell and his colleagues are serious about tackling inflation, said Minneapolis Fed President Neel Kashkari.
“I was actually happy to see how Chair Powell’s Jackson Hole speech was received,” Kashkari said in an interview with Bloomberg’s Odd Lots podcast on Monday, reflecting on the steep drop after Powell spoke. “People now understand the seriousness of our commitment to getting inflation back down to 2%.”
This sort of comment sets a bad precedent. I have no objection to Fed officials being happy because markets take their comments seriously. Thus Kashkari might have cited the modest fall in inflation expectations (measured by TIPS spreads) during Powell’s speech.
But TIPS spreads are a nominal variable. Because the price level changes very little from one day to the next, a more than 3% drop in the stock market reflects implies an almost equally large drop in real equity prices. It’s hard to believe that monetary policies likely to improve our economy would cause real stock prices to fall by more than 3%.
Again, this doesn’t mean Powell should not be trying to reduce inflation expectations. At the moment, a tighter monetary policy is probably appropriate. But I don’t believe it is a good idea to use falling stock prices as a measure of success. If it were, then why stop with a 3% decline? The Federal Reserve of 1929 also tried to reduce stocks prices, and was far more “successful” in that endeavor than the Powell Fed. And we all know how that ended up.
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