Lower Stock Prices Are The Fed's Goal

Interesting article I read this morning.

Fed members will not say it as bluntly as we do in our title. But they have 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 they are likely using their stock market lever, specifically lower stock prices, to help improve the efficacy of monetary policy.


Ben Bernanke laid the groundwork for the Wealth Effect. His theory associates stock prices with the transmission of monetary policy to the economy.

In a speech entitled Monetary Policy and the Stock Market: Some Empirical Results Bernanke states:

The logic goes as follows: Easier monetary policy, for example, raises stock prices. Higher stock prices increase the wealth of households, prompting consumers to spend more–a result known as the wealth effect. Moreover, high stock prices effectively reduce the cost of capital for firms, stimulating increased capital investment. Increases in both types of spending–consumer spending and business spending–tend to stimulate the economy.

Bernanke argues that additional wealth resulting from stock market gains results in more household spending. While he doesn’t say it in this speech, the Wealth Effect also works in reverse!

LINK