Tune in to CNBC or Bloomberg, and one guest after another accuses the Fed of ignoring the markets. The chorus of reporters, anchors, and interviewers is even louder. CNBC’s chief economics reporter, for example, hectored New York Fed President John Williams on this point with the tenacity of a dog whose master is trying to retrieve a chew toy from its grip. A Bloomberg anchor described Fed Chair Jerome Powell’s December 19 news conference in, well, less than flattering terms, implying the Fed has a “communication” problem.
The “markets” in this context means the stock market, apparently the only market that many of these folks really care about. It seems the Fed is depriving stock investors of their fundamental right to endless double digit price gains. The counterpoint, to take Williams’ response as an example, is that the Fed is paying attention, but as just one data point among many.
The real complaint however boils down not to the amount of attention Fed has been paying markets, but what kind. Fed meeting minutes and its recent financial stability report indicate the Fed has grown concerned about high asset values, or in plainer language, a stock market bubble. Of course the Fed as an institution can’t come right out and say it thinks there is a stock market bubble, so that’s about as close as it gets.
If anything in the past the Fed has tended to dismiss asset price inflation, taking the narrow view that it should only be concerned with inflation in domestic consumption prices. But experience indicates that asset price inflation has to be on the radar and a bubble is a pretty darn legitimate concern. When bubbles burst they can do a lot of damage and hurt people who had nothing to do with them. Virtually everyone alive has been affected in some way by the stock market bubble of the 1990s, the housing and credit bubble of the 2000s, and the aftermath of their implosions. The leadership at the Fed gets that. Of course it doesn’t want to wreck the economy, but the possibility that further underwriting ever higher stock prices would do just that appears not to occur to its media detractors.
In any case, their pleas that the Fed pay more attention to the stock market could hardly be more misplaced.