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Home Publications Blogs Beat the Press The Fed's Mandate Means That It Must Pay Attention to Stock and Housing Prices

The Fed's Mandate Means That It Must Pay Attention to Stock and Housing Prices

Sunday, 16 March 2014 14:37

A NYT commentary by Jeff Sommer told readers that the Fed is not likely to focus much on recent trends in stock and housing prices at its next meeting because asset prices are not part of its mandate. The piece commented:

"Even if such issues [recent trends in stock and house prices] provide a subtext for Fed discussions, the direct effects of Fed policy on the stock and housing markets may not be an explicit part of the Fed’s agenda this week.

"That’s partly because Congress didn’t include financial asset prices in the Fed’s mandate, which is 'to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.' Those stable prices referred to items like cars, food and shoes, not to financial assets like stocks and bonds, whose price levels fall outside the Fed’s traditional purview."

The last two recessions were caused by collapses in asset bubbles. These collapses had enormous impact on employment, as well as inflation and interest rates. It would be absurd for Fed officials to say they will not focus on asset prices because they are not directly part of their mandate.

Comments (3)Add Comment
We've driven prudent policy under wraps
written by Dave, March 16, 2014 3:03
Bernanke stopped the housing bubble without anyone having official notice that he was doing it. It still goes unknown because it isn't in the transcripts. Of course it isn't in the transcripts because it wouldn't fit the direct, official mandates.

The Fed has done the best it can do given what it has to work with. The smart branch of the Fed is hanging on to prudent policy through intelligent scripting of official communication. Congress isn't currently smart enough to reform Fed mandates to make them work properly.

So what are citizens supposed to do? Most have no idea what is going on. What needs to happen is there needs to be a smartening up of congress and the voters, but nobody believes our system if functional enough to handle pure honesty in such matters.

This doesn't bode well. Democracy demands honesty, which is enforced through the press, and the press has failed.

When somebody comes up with a solution that we can help with, please let us know.

the fed's role ...
written by Squeezed Turnip, March 16, 2014 8:26
the fed currently enforces a 50% margin for investors in securities. The Fed can modify that margin requirement at any time. While it is true the Fed is not concerned directly with the valuations of stocks etc. they are 100% directly concerned with market-based credits that are used to finance positions. About 40% of wealth is in stocks and bonds, so I'm sure the amount of leveraging in that area is being monitored closely.
the Fed should not try to read the market....
written by pete, March 17, 2014 12:01
Many many very serious people lost a lot of money in 2000 and in 2008. To say that the Fed can outthink these idiots is pure folly. It has no more information than Goldman Sachs or Jamie Dimon. As Shiller has said, most stock price movements are simply noise. Hard to compete against 6 billion irrational investors. The mandate is quite clear, and should not be messed with. If the Fed gets into the game of manipulating stock prices, this could eaily morph into guaranteeing stock returns. This would absolutely be a horrible policy.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.