The Fed Wants Lower Stock Prices

HFA Padded
Advisor Perspectives
Published on

You read that right. The Fed wants lower stock prices.

Fed members will not say it as bluntly as I did in my title. But the Fed has a long-held belief that stock prices directly impact the economy and, therefore, inflation. Thus, in the Fed’s efforts to quell inflation, it makes sense that it is using its stock market lever, specifically lower stock prices, to improve monetary policy.

Q4 2022 hedge fund letters, conferences and more

Before I delve into recent Fed comments about asset prices and describe the groundwork that Ben Bernanke laid for the Fed’s stock market theory, I share a quote from Fed Chair Janet Yellen in September 2016:

It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions.

December 2022 FOMC minutes

In the minutes of the December 15, 2022 FOMC meeting was the following statement:

Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.

More straightforwardly, financial markets are an important way monetary policy is transmitted to the broader economy. As such, higher stock prices (“an unwarranted easing of financial conditions”) driven by a belief the Fed will pivot to lower rates make it more challenging for the Fed to tackle inflation.

In lay terms, lower stock prices can help the Fed get inflation back to its 2% objective.

Jerome Powell and other Fed members have made similar statements. On Friday, August 26, 2022, Powell made an exceptionally hawkish speech about raising interest rates further than market expectations to ensure a successful fight against inflation. The S&P 500 fell more than 3% that day as investors expected a more market-friendly tone.

On the following trading day, Minnesota Fed President Neel Kashkari responded: “I was actually happy to see how Chair Powell’s Jackson Hole speech was received.” Kashkari was cheering on lower stock prices!

Ben Bernanke coins the wealth effect

In 2003, Ben Bernanke laid the groundwork for the wealth effect, which associates stock prices with the transmission of monetary policy to the economy.

Read the full article here by , Advisor Perspectives.

HFA Padded

The Advisory Profession’s Best Web Sites by Bob Veres His firm has created more than 2,000 websites for financial advisors. Bart Wisniowski, founder and CEO of Advisor Websites, has the best seat in the house to watch the rapidly evolving state-of-the-art in website design and feature sets in this age of social media, video blogs and smartphones. In a recent interview, Wisniowski not only talked about the latest developments and trends that he’s seeing; he also identified some of the advisory profession’s most interesting and creative websites.