I have often argued that Fed policy should not try to raise equity prices. It is (at least) equally true that the Fed should not try to drive down equity prices. not everyone Seems to agree:

Minneapolis Fed President Neil Kashkari said the sharp stock market losses showed investors got the message that Jerome Powell and his colleagues are serious about tackling inflation.

“I was really happy with how Chair Powell’s Jackson Hole speech was received,” Kashkari said Monday in an interview with Bloomberg’s Odd Lots podcast, reflecting on the steep drop after Powell spoke. “People now understand the importance of the commitment to bring inflation down to 2%.”

This kind of comment sets a bad precedent. I don’t mind Fed officials being happy because the market takes their comments seriously. Thus Kashkari could be referring to the slight decline in inflation expectations (as measured by the TIPS spread) during Powell’s speech.

But the TIPS spread is a nominal variable. Because price levels change so little from one day to the next, a drop of more than 3% in the stock market reflects an almost equally large drop in real equity prices. It’s hard to believe that monetary policies can improve our economy by reducing real stock prices by more than 3%.

Again, that doesn’t mean Powell shouldn’t try to lower inflation expectations. At this point, a tighter monetary policy is probably appropriate. But I don’t believe it’s a good idea to use falling stock prices as a measure of success. If it was, then why stop with the 3% decline? The Federal Reserve in 1929 also tried to lower stock prices and was much more “successful” in that effort than the Powell Fed. And we all know how that ended.


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