Speech

What Role for Asset Prices in U.S. Monetary Policy? BradleyUniversity Peoria,Illinois September5,2001 Arecurring topic of debate among ResearchDivision.However,Iretainfullrespon- monetary policymakers and academic sibilityforerrors. experts for a decade and more is Hereismyplanofattack.I’llbeginwithabit whether, and under what conditions, ofbackgroundmaterialtosetthestageforthe a central bank should adjust policy in an effort analysisthatfollows.NextI’lldiscussmonetary to affect the direction of the stock market. This policyimplementation,whichworksthrough issue arose initially in the context of the stock thebondmarket,whichisoneoftheeconomy’s market boom in Japan in the late 1980s and the importantassetmarkets.Followingthatdiscus- subsequent market decline in the 1990s. Not sion,I’llemphasizetheinformationtobegleaned only did the Japanese stock market decline, but fromassetmarkets.Theinformationalvalueof also the Japanese economy has suffered from an thesemarketsstemsfundamentallyfromthefact almost continuous stagnation since the early thatassetmarketsareforward-looking,andthe 1990s. In the United States, the stock market centralbankmustalsobeforward-looking.Finally, boom after 1995, and especially after the fall of I’lltakeuptheissueofwhetherthestockmarket 1998 until the early part of 2000, raises the same shouldbeadirectobjectofmonetarypolicy.To issue. Given that the U.S. economy’s growth has endthesuspense,IwanttomakeclearthatIam been near zero this year, it is natural to ask aone-armedeconomistonthisissue.Myanswer whether tempering the prior stock market and isno,no,athousandtimesno,thecentralbank economic boom might have reduced the diffi- oughtnottotargetthestockmarketitself. culties the economy has faced this year. I’mgoingtodiscussthisissueascarefullyas Ican,butinabroadercontextofassetpricesin BACKGROUND general.Althoughthestockmarketandbusiness Inthe17-monthperiodfromApril2000 high-techinvestmentarethefocusofattention throughAugust2001,theU.S.stockmarketlost today,10yearsagotherealestatemarketwasthe roughlyaquarterofitsvalueasmeasuredbythe issue.Theparallelsarestriking—today,declining Wilshire5000,thebroadeststockmarketindex. stockprices,weakbusinessinvestment,distressed BytheendofAugust,theWilshire5000had stockmarketinvestors—10yearsago,declining realestateprices,weakconstructionspending, returnedtoitslevelofNovember1998.Theboom- anddistressedlenders. ingstockmarketinthelate1990smadeiteasyto Beforeproceeding,Iwanttoemphasizethat financeallsortsofnewenterprises,including theviewsIexpressherearemineanddonot especiallydotcomsandtelecoms.Manyofthese necessarilyreflectofficialpositionsoftheFederal companiesarenowinsignificanttrouble,orhave ReserveSystem.Ithankmycolleaguesatthe alreadydisappeared. FederalReserveBankofSt.Louisfortheircom- Let’stakeacloserlookatthetelecomindustry, ments,especiallyRobertRasche,directorof whichisquantitativelymuchmoreimportantthan Research,andFrankSchmid,economistinthe thedotcomindustry.FromDecember1990through 1 MONETARYPOLICYANDINFLATION March2000,theNasdaqTelecommunications MONETARY POLICY Indexincreasedbyalmost1300percent,whereas IMPLEMENTATION theWilshire5000stockmarketindexincreased byabout360percent.Theincreasedimportance Thecentralbankimplementsmonetarypolicy ofthetelecomindustryinthestockmarketwas throughthefinancialmarkets,andsopolicy implementationisalogicalplacetobeginacare- accompaniedbyaneardoublingoftheindustry’s fulanalysisofmytopic.Mostfundamentally, shareinrealGDPfrom1990to2000.InApril2000, theaimofmonetarypolicyistocreateliquidity theNasdaqTelecommunicationsIndexbegana attheraterequiredtokeeptherateofinflation 12-monthdeclineinwhichitshed60percent. lowandstable,averagedoveraperiodofseveral Bankruptciesandrestructuringaccompaniedthe years.Monetarypolicycanalsovarytherateof declineinstockmarketvaluation;therewereplant liquiditycreationintheshortruntohelpstabilize closuresandsignificantlayoffs.Asthetelecom employmentandoutputgrowth. industryshrinks,thereseemslittledoubtthere Toimplementpolicy,theFederalReserve wasamisallocationofresourcesinthelate1990s. setsatargetforthefederalfundsrate,whichis Thetelecomeuphoriawaswidespread.Thestock thepriceofovernightinter-bankloans.Market marketwaspartofthiseuphoria,andthedistorted expectationsastothefuturepathoftheeffective assetpricesignalsfromthestockmarketpermitted federalfundsratetiedowntheyieldsofshort- theindustrytoraisecapitaleasilyandcheaply, maturityTreasurysecurities,andthoseinturn whichcertainlycontributedtotheover-expansion. affectlong-termTreasurybondyieldsandyields Fromwhatwenowknow,itiseasytoquestion inthecorporatebondandmortgagemarkets. theeffectivenessofthestockmarketinallocating Bondprices,ofcourse,moveinverselytobond scarceresourcestotheirmostefficientuse.Could yields.Bondpricesareoneinfluenceonequity theFederalReservehavepreventedsuchwaste andreal-estateprices. ofresourcesandtheaccompanyinglossesto Thetransmissionofmonetarypolicyactions investors?Thisisnotaneasyquestion,butobvi- totheeconomyworksthroughmanychannels, ouslyanimportantone.Thequestionisnoteasy butI’llmentiontwothatareespeciallyrelevant becauseanytimeanenterprisefailswecansay inthecontextofthislecture.Allelseequal,a thattherewasamistake.Theissueiswhether lowerbondyieldwilltendtoraisestockmarket wecanreliablyidentifysuchcasesinadvance. valuations.Asthecostofcapitaldecreases,more I’mgoingtoembedmystockmarketanalysis investmentprojectsbecomeprofitable,which inabroaderanalysisofassetpricesingeneral. encouragesincreasesincapitalspending.Asec- Thereisamultitudeofothertypesofassetsin ondeffectarisesbecausechangesinstockmarket theeconomybesidesstocks,andmanyofthese valuationalsoaffecthouseholdwealthandthus, assetsareeverybitasimportantasequities.As possibly,consumptionexpenditures.Themagni- oftheendofthefirstquarterofthisyear,datafor tudeandtimingoftheseeffectsareuncertain, theUnitedStatesshowthatthetotalmarketvalue whichisoneofthethingsthatmakesmonetary ofequitieswasabout$14.9trillion,bondsabout policymanagementachallenge. $14.6trillion,andhouseholdrealestateabout $11.3trillion.Althoughthestockmarketishighly visiblebecauseofitsextensiveminute-by-minute THE INFORMATIONAL ROLE OF reporting,thesamesortofpolicyissuesarisein THE TREASURY MARKET theseotherassetmarkets.Shouldthecentralbank acttotemperahousingboom,oracommercial Whenanalyzingtheimplementationofmon- realestateboom,orabondmarketboom?The etarypolicyandhowpolicyeffectsaretransmitted samequestionarisesifwereplace“boom”with totheeconomythroughchangesinassetprices, “swoon.” clarityrequiresassuming“allotherthingsbeing 2 WhatRoleforAssetPricesinU.S.MonetaryPolicy? equal.”But,allotherthingsarealwayschanging. Becauselowandstableinflationisakey Thatfactopensupthepossibilitythatthebehav- objectiveofmonetarypolicy,theTIPSspread iorofassetpricescontainsinformationabouthow providesimportantevidenceonwhetherthe otherthingsarechanging.Suchinformationcan marketbelievestheFedwillbesuccessful.The beinvaluableinadjustingmonetarypolicy spreaddoesnotreflectajudgmentonewayor appropriately. theotherastowhetherthecurrentrateofliquid- Aparticularlyclearandimportantexample itygrowth,orthecurrentfederalfundsrate,is ofinformationembeddedinassetpricesisinfor- appropriatebutratherthattheFedwillmake mationoninflationexpectationsandtherealrate whateveradjustmentsinpolicyarerequiredto ofinterest.Therealrateofinterestisthereturn keepinflationlowonaverageinfutureyears. onanassetaftertakingaccountofinflation.Today, ShouldtheTIPSspreadstarttomoveconvinc- wearefortunatetohaveexcellentinformation inglyhigher,inmyjudgmentitwouldbeimpor- oninflationexpectationsandtherealyieldon tantfortheFederalReservetoacttoensurethat TreasurybondsfromtradinginTreasuryInflation- policybecamelessexpansionary.Or,ifwewere ProtectedSecurities,knowninthemarketas convincedthatthemarketwassimplymakinga “TIPS.”Thesebonds,firstissuedbytheTreasury mistakeinitsjudgment,itwouldbeimportant in1997,containaprovisionthatincreasestheir toexplaintothemarketthenatureofthemis- principalandeverysemiannualinterestpayment take. bytheincreaseintheconsumerpriceindex.TIPS, Perhapslesswellappreciated,therealyield therefore,completelyprotecttheinvestorfrom isitselfavaluablepieceofinformation.Onemeas- theeffectsofinflationandtheyieldonthebonds ureofhowthethrustofmonetarypolicyischang- isbydefinitionarealyield.Thedifferencebetween ingisthedirectionofchangeintherealyield. theyieldonaTIPSbondandaconventionalbond Whenthecentralbankwantspolicytobemore providesameasureofthemarket’sexpectation expansionary,ingeneralitwantstoseethereal offutureinflation.Forexample,lastThursday yieldfall,allotherthingsbeingequal.Between theTIPSbondmaturingApril2029hadayield May2000andlastThursday,theyieldonthe of3.41percentwhileaconventionalTreasury TIPSbondmaturingin2029fellfrom3.97per- bondmaturingAugust2029hadayieldof5.46 centto3.41percent.JusttobesurethatIdonot percent.Ignoringthetrivialdifferencebetween leaveamistakenimpression,however,Ihasten theAprilandAugustmaturitydates28yearsin toaddthattherealyieldinaneconomyisnot thefuture,thesetwobondswillturnouttohave determinedprimarilybymonetarypolicybut identicalyieldsiftheinflationratebetweennow insteadbytheinteractionoftherealrateofreturn and2029averages2.05percent,thedifference onphysicalcapitalandavailablesavings—by betweenthetwoquotedyields.Asafirstapprox- “productivityandthrift”tousetheclassic imation,wecansaythatthesetwoassetmarkets terminology. areprovidinguswiththeinformationthat BeforeTIPSwereavailableinthemarketplace, investorsexpectthattheinflationratewillaver- wewouldhaveobservedthattheconventional age2.05percentoverthenext28years. Treasurybondmaturingin2029hadgonefrom TheTIPSspreadhasfluctuatedabitin 6.28percentinMay2000to5.46percentlast recentyears,butitissafetosaythattheabsence Thursday.Todecidehowmuchofthechangein ofanysignificanttrendinthespreadprovides thenominalyieldonconventionalbondsreflected convincingevidenceofthemarket’scontinuing achangeintherealyieldandhowmuchachange confidencethattheFederalReservewillpursue ininflationexpectations,wewouldhavehadto policiesthatwillkeeptherateofinflationrela- relyonsurveydataoninflationexpectations, tivelylowforyearstocome.Thatisanimportant haveestimatedamodelofsomesort,ormadean pieceofinformation,highlyrelevanttothecon- educatedguessonhowthetwocomponentsof ductofmonetarypolicy. thenominalyieldwerechanging. 3 MONETARYPOLICYANDINFLATION Thisdiscussionofinformationavailable readilyraisefundsinthemarket,whichsupports fromtheTIPSmarketillustratesamoregeneral higherbusinesscapitalspending.Conversely, point:Weareabletoextractusefulinformation decliningstockpricesmayportendweakercapi- fromanumberofnewmarkets,suchasfutures talspending.Thisinformationisobviouslyrele- andoptionsmarkets,thatisextremelyvaluable vantformonetarypolicy. forimprovingtheinformationbasenecessaryfor Unfortunately,stockpriceshaveasignificant moreeffectivemonetarypolicy.Idon’twantto overlayofnoise—uninformative,short-runfluc- gettoofarafield,butwillofferonemoreillustra- tuations—thatmakesithighlyproblematictoput tionofthispoint:Tradingindistantcrudeoil muchweightonthestockmarketinreaching futurescontractshelpsustounderstandthe judgmentsabouttheappropriatecourseofmon- market’sbestguessabouttheprobablefuture etarypolicy.Moreover,itdoesseemthatsome directionofenergyprices.Thatinformationhelps changesinmarketpricesreflectanirrational ustounderstandwhetherarun-upofoilprices component. mightindicateadevelopinglong-terminflation Idonotbelievethatanyonewilleverfind problemorislikelyatemporaryphenomenon. simple,straight-forwardmeasuresoftheirrational componentorregularitiesthatwillpermitusto determinereliablythatthestockmarketissignifi- THE INFORMATIONAL ROLE OF cantlyover-orunder-valued.Investmentsuccess isjustnotthateasy.Forexample,theP/Eratio THE STOCK MARKET fortheS&P500stockindexreachedapeakin Letmenowturntothestockmarket.Itisfair 1991thatwashigherthananyotherearlierP/E tosaythatmanyquestionssurroundingtheequity peaksinceWorldWarIIandyetthestockmarket marketarenotwellunderstood.Thedearthof enjoyedatremendousboomintheyearsthat knowledgeinthisarealimitsitsroleasaprovider followed. ofinformationformonetarypolicydecisions. Everytimethestockmarketdeclinessignifi- Thekeytheoreticalprinciplehereisthatthe cantly,itisnothardtofindsomeonewho“pre- valueofastockisbasedonexpectedgrowthof dicted”thedecline.Theepisodewearecurrently thecompany’searnings,theriskinessofthecom- livingthroughisnodifferent.Shortlybeforethe pany,andsomeotherfactorsthatarenotcentral marketpeakedinMarch2000,RobertShiller,a tomyanalysis.Actualearningsgrowthchanges respectedfinancescholarfromYaleUniversity, overtimeandsodoexpectations.Empirical publishedabookentitledIrrationalExuberance. studiesshowthatchangesinactualearnings HeconcludedthattheU.S.stockmarketwas growthaccountonlyforafractionofthechanges poisedforasharpdecline.Shiller’sbookisan instockprices.Theissueistheextenttowhich efforttobetterunderstandthemarketbydrawing theremainderofchangesinstockpricescanbe oninsightsfrompsychologyaswellaseconomics, attributedtoreasonedandwell-informedexpec- andheillustratedmanyofhisideasbyreferring tationsaboutfutureearningsgrowthandthe tothestateofthemarketin1999. extenttowhichweshouldconcludethatstock WhereIcomeoutontheseissuesisthatthe pricesare“irrational.” stateofknowledgeissoincompletethatitisfool- Muchofthetime,Ibelieve,stockprice hardyformetoformgenuineconvictionsasto changesdoreflectreasonedinformationabout whenthestockmarketisover-orunder-priced. futureearningsgrowth.Thus,myfirstinstinctis Imayhavevague,gutfeelingsfromtimetotime, tointerpretstockmarketchangesasreflecting butIdonottrustsuchfeelingstoformabasisfor probablechangesinfutureearnings,whichin monetarypolicydecisions.Moreover,Iamcon- turnmayreflectemergingtrendsintheeconomy. vincedthatasscholarlyworkonthestockmarket Moreover,anenvironmentofrisingstockprices improvesourunderstanding,thatworkwillinflu- isordinarilyoneinwhichcompaniescanmore encemarketbehaviorandhelptoreducethe 4 WhatRoleforAssetPricesinU.S.MonetaryPolicy? magnitudeofmispricing.Nevertheless,wewill pricesfarlargerthananticipatedordesired.Either stillbeleftwithalargerangeofuncertaintyin resultmaydamagetheFed’scredibility.Ireject anygivencircumstances. asunwiseintheextremeacallto“dosomething” Insummary,thebehaviorofthestockmarket withoutanyreasonablebasisforestimatingthe hasneverbeeneasytodecipher.Iamconvinced probableeffectsoftheaction. thatthereisusefulinformationinthemarket, Ifchangingmarginrequirementsdoesnot butalsothatitisalwaysnecessarytobevery haveapredictableresult,whataboutchanging skeptical.Inmymind,thestockmarketalone thetargetrateforfederalfunds?Itisveryimpor- neverprovidesreliableinformationbutitcanbe tanttounderstandthattheFederalReservehas veryusefulinsupplementingorreinforcing onlyonemonetarypolicyinstrument,whichis informationfromothersources. thefederalfundstargetrateor,moregenerally, therateatwhichtheFedprovidesliquidityto theeconomy.Awidelyknownresultfromcon- SHOULD THE STOCK MARKET troltheorystatesthat,withoneinstrument,the BE A DIRECT OBJECT OF policymakercanatbestachieveonepolicyobjec- tive.Thatobjective,inmyview,oughttobea FEDERAL RESERVE POLICY? lowandstablerateofinflation.Asamatterof I’vearguedthatitisdevilishlydifficultto logic,therefore,pursuingaseparatestockmarket extractinformationfromthestockmarketuseful objectivemeanscompromisesofsomesorton formonetarypolicy.Theconverseofthispropo- theinflationobjective.Clearly,targetingthestock sitionisthatanyparticularmarketmovemaybe marketmightcomeatahighprice.Oncethe fullyjustified—itisjustnoteasytotell.Clearly, FederalReservecompromisesonitspricestability itwouldbeamistakeforthecentralbankto goal,inflationandinflationexpectationsbuild attempttorollbackamarketmovethatwasin up.Experienceshowsthatinflationexpectations factfullyjustified.Thatisaverygoodreasonfor arepersistent,andinflationfightingtendstoentail thecentralbanknottotargetthemarketdirectly. recessions.Becausepermittingtheeconomyto Thecentralbankshouldleavethiskindofjudg- runofftrackhasnegativeconsequencesforthe menttomarketmechanisms. stockmarket,anyefforttotargetthestockmarket Suppose,though,thatyoudonotsharethis islikelytobeself-defeating. view.Theproblemthenistofigureoutwhatthe FederalReservecoulddotopushthestockmarket upordown.Inthelate1990s,someproposed TARGETING THE STOCK MARKET: thattheFedshouldusemarginrequirements, A QUALIFICATION whichhavebeenheldstableat50percentsince 1974.Theargumentwentthathighermargin Onrareoccasions,oneormoreassetmarkets requirementswouldmakeitmorecostlyfor maygointoafreefallthatcallsforacentralbank investorstofinancestockownershipbyborrow- response.October19,1987,wassuchacase.The ingfrombrokers,andthattheincreaseinstock chaoticdeclineinstockpricesthatdaythreatened priceswouldconsequentlysloworstop.From themarketmechanismitself.Asomewhatsimilar, myperspective,themarginrequirementisahaz- butlessextremeandlessdramatic,episode ardouspolicytoolbecauselittleisknownabout occurredinthefallof1998,whenanumberof thepotentialconsequencesofsuchamove.There assetmarketsweredisruptedoverseveralweeks isaspectrumofconceivableconsequencesassoci- followingtheRussiandefaultandnearfailureof atedwithachangeinmarginrequirements:On LongTermCapitalManagement.Iaddressedthis oneendofthespectrumliescompleteineffective- subjectinLondonlastNovemberinmyHenry ness,andontheotherendliesachangeinstock ThorntonLecture,entitled“Expectations.” 5 MONETARYPOLICYANDINFLATION Thediversityofthesecases,andtheunique TheFeddoesnotinfactemployanInstru- circumstancesineachcase,iswellillustratedby mentX.Instead,itadjustsitstargetforthefederal addingtwomoreentriestothelistI’vementioned. fundsrateinanattempttoreproduce,moreor OnewasthefailureofthePennCentralRailroad less,howthatratewouldchangeinresponseto in1970,whichledtoextensiveproblemsinthe marketforcesiftheFedactuallyemployedInstru- commercialpapermarket.Anotherwasthenear mentX.ThatmeansthattheFedispreparedto failureandbailoutofContinentalIllinoisBank adjustthefederalfundstargetinresponseto in1984,whichdisruptedthebankCDmarket.A eventsofallkindsthatmightpushtheeconomy contrarycase,whichnicelyillustratesthegeneral offitsdesiredtrack.TheFedmayrespond,there- principle,wasthefailureofDrexel-Burnham- fore,tostockmarketfluctuationsifdoingsois Lambert,amajorsecuritiesfirm,in1990.Neither necessarytooffsettheeffectsofthosefluctuations. theFederalReservenoranyotheragency Thisisadistinctionwithadifference.Atany respondedtothisfailure,andthemarketabsorbed giventime,manydifferentimpulsesareaffecting thenewswithoutsignificantproblems.Thegen- theeconomy.Ifthestockmarketisfallingina eralprincipleatworkinthesecasesisthatthe sustainedway,whichbyitselfwouldtendto centralbankmayneedtorespondwhenmarket reducetheeconomy’supwardmomentum,but mechanismsthemselvesaredamagedbywhat- thesumtotalofallotherfactorsisstillgenerating evereventhasoccurred. excessiveupwardpressure,thenitwouldbe appropriatefortheFedtotightenpolicydespite thepossibleadverseeffectonstockprices.Target- AN IMPORTANT DISTINCTION: ingtheeconomyandtargetingthestockmarket OFFSETTING THE EFFECTS OF persearetwoverydifferentthings. ASSET PRICE CHANGES Thestockmarketisrelevantformonetary policyinatleasttwodifferentways.First,for I’veemphasizedthat,exceptfortherare thehouseholdsector,adepreciationinthestock qualificationofmarketdisruptionssosevere marketrepresentsadeclineinpersonalwealth. thatmarketmechanismsthemselvesareatrisk,I Althoughlowerpersonalwealthimplieslower amconvincedthatthecentralbankoughtnotto consumptioncapacity,theevidencedoesnot targetassetpricesthemselves.But,thatdoesnot indicatethattheinfluenceofthestockmarket meanthatassetpricesareirrelevanttomonetary onpersonalconsumptionisquickandhighly policyandthattheymightnotinduceapolicy predictable.Despitetheuncertainty,giventhe response. potentiallyharmfuleffectofstockmarketdepre- SupposetheFederalReserveimplemented ciationonconsumption,theFedobviouslycannot policywithapolicyinstrumentotherthanthe ignorethisissue.Astockmarketdeclinemakes federalfundstargetrate—I’llcallitInstrumentX. meespeciallysensitivetothepossibilitythat HowwouldInstrumentXbehave?Howwould interestratesbehave? consumptionmightbeadverselyaffected,andif Tokeeptherateofinflationlowandstable, suchaneffectissupportedbyotherdata,Iam theFedwouldadjustXfromtimetotimetooff- moreinclinedtofavorpolicyactionthanIother- setwhateverdisturbancesthreatenedtopushthe wisewouldbe. rateofinflationoffitsdesiredlowandsteady Second,forthebusinesssector,thestock path.AsaconsequenceofchangesinX,andas marketaffectsthecapacityoffirmstoraisecapital aconsequenceofchangeselsewhereintheecon- tosupportnewinvestmentspending.Hereagain, omy,interestrateswouldriseandfall,muchthe theeffectsarenothighlypredictablebutcom- waygasolinepricesriseandfallasaconsequence binedwithotherevidencethebehaviorofthe ofactionsbyOPEC,seasonalpatternsindemand, stockmarketcancontributetotheoverallassess- refineryfires,andsoforth. mentoftheoutlookforinvestment. 6 WhatRoleforAssetPricesinU.S.MonetaryPolicy? AnexampleinwhichtheFederalReserve market.Thatisthekindofjudgmentthatmarkets succeededinoffsettingpotentialdamagefrom excelinmaking,atleastrelativetothejudgments anabruptdisruptionofthesecuritiesmarketswas madebypublicofficials. theRussiandefaultondomesticgovernment Iwanttofinishonapersonalnote.During debtinthesummerof1998.TheFederalReserve thelate1990s,andespecially1999,therewere swiftlyrespondedwithmonetaryeasingtopre- elementsofmarketbehaviorthatmademevery ventdisruptionsinthefinancialsectorfrom uncomfortable.Theissuewasnotjusttherun-up spillingoverintotherealeconomy.Thedropin ofpricesbutalsotheexpansionofspeculative theS&P500stockindexbyabout10percentin trading,especiallyday-tradingbyapparently thethirdquarterof1998wasfollowedbyamore inexperiencedindividuals.Thelackofattention than20percentincreaseinthestockmarketindex byanalyststoearningsprospectsofsomecom- inthesubsequentquarter.Economicgrowth panieswastroubling.Atthesametime,themar- continuedunabated.Theratecutsinthefallof ketseemedvulnerabletotriggeringeventsthat 1998weresubsequentlyreversedandinflation mightinduceasharpdecline.Astroublingasthis remainedsubdued.Theepisodeillustratesthat situationwas,itdidnotseemappropriateforme policyactionstopreventfinancialmarketdisrup- todiscussthemarket.InsofarasanycommentsI tionfromspillingovertothegeneraleconomy mightmakewouldhaveaneffectonthemarket, neednotconflictwithachievingtheprimary Ihadnoideawhattheseeffectsmightbe. goaloflowandstableinflation. Indeed,themarketenvironmentwassuch thatIdidnotwanttoutterthewords“stock”and “market”backtobackinaspeech,eventodis- CONCLUDING REMARKS cusstheissuesatafairlygenerallevelasIhave inthislecture.Itisunfortunate,Ithink,whena Assetmarketsplayacentralroleinamarket topicseemssosensitivethatevenageneraldis- economy.Policymakerscannotandoughtnot cussionisinadvisable.Buttoday’senvironment ignorethesemarkets.Makingeffectiveuseof iscalmer,andIhopethatIhavebeensuccessful informationfromassetmarketsandoffsetting,to inestablishingthecriticallyimportantdistinc- theextentpossible,adverseeffectsonthegeneral tionbetweentargetingthestockmarketitself economyflowingfromassetpricechangesare andoffsettingundesiredeffectsofstockmarket importantingredientsofasuccessfulmonetary changes.Thejobofthecentralbankiskeepthe policy. rateofinflationlowandsteadyandcontributeto ForreasonsI’vetriedtoexplainwithsome sustainedeconomicgrowth.Policyactionswill care,IbelieveitisveryimportantthattheFederal affectassetmarketsfromtimetotime,butinmy Reservenottakeapositionperseonthelevelof viewtheseeffectsoughtalwaystobesideeffects pricesinassetmarkets,especiallythestockmar- ofthecentralbankpursuingitsresponsibilityfor ket.Itisveryeasytobewrongabouttheappro- thegeneralhealthoftheeconomy. priatelevel;thisjudgmentoughttobelefttothe 7

William Poole (2001, September 4). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20010905_poole

@misc{wtfs_speech_20010905_poole,
  author = {William Poole},
  title = {Speech},
  year = {2001},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20010905_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}