The Fed Wants Lower Stock Prices

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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.

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.