The once-benevolent central bank now looks vengeful for markets
Save time by listening to our audio articles as you multitaskIn more analytical, if less humorous, terms, another way of framing this shift is to ask whether the Fed put has become a Fed call. The concept of a Fed put dates back to the era of Alan Greenspan, a former chairman of the central bank. Starting with the stockmarket crash in 1987 and continuing for more than three decades, the Fed earned a reputation for easing policy, notably by cutting interest rates, whenever share prices plunged.
This argument may, at first glance, seem rather crude. The Fed has long denied that it targets asset prices in setting monetary policy. Narrowly, its denials are credible. Central bankers look at oodles of data, from real-time growth figures to surveys of inflation expectations. They cannot afford to be swayed by swings in stocks. Moreover, share prices reflect many factors ranging from the overall economic outlook to corporate idiosyncrasies.
Concerns about inflation only add to the market’s importance. When share prices rise, consumers, feeling flush, tend to spend more money and companies, feeling confident, tend to hire more workers. A paper in 2019 by Gabriel Chodorow-Reich of Harvard University and colleagues concluded that each dollar of increased stockmarket wealth lifted consumer spending by about three cents annually, while also boosting employment and wages.
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