* Former New York Fed Head Bill Dudley tells us what we already know - the Fed targets stock prices
* Another Fed rant...
"It's hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it'll have to inflict more losses on stock and bond investors than it has so far."
Dudley, former President of the Federal Reserve Bank of NY, and Vice Chair of the Fed Open Market committee - the guys that buy and sell government securities - certainly knows how the Fed thinks and what they do, behind the scenes as well.
So there it is. He put in print what we all knew. The Fed targets asset prices, especially stock prices. If he is telling you they want to drive stock prices down, that also means there are many times where they have acted to drive stock prices up. Where is that in their mandate? This shows you that the Fedsters are not that savvy when he admits to it in print.
His comments on influencing asset prices go well beyond the salutary effect lower rates have. We have had untold amounts of QE, and even the buying of risky securities in violation of the Federal Reserve Act of 1913. And who knows what else behind the scenes?
The bottom line is, the Fed has been using the stock market as a policy tool.
One can argue about how appropriate the "wealth effect" based policies are that came into place during the Greenspan administration, but the results are clear. With an assist from the Fed, the gap between the rich and poor is as large as it has ever been.
GDP growth has slowed and we have had near wipeout events due to gross speculation. Even if wealth effect based policy was appropriate to some degree, lines need to be drawn. But once the Fed does it as a quick shot of relief, then the next move is to do more, and it get baked into the system, and it starts to be done with no restraint as a quick and easy solution.
This does not come free. Because of this, necessary underlying structural policy change is not made by the politicians - who instead act silly, and spend more to buy votes - and all sorts of imbalances build up as the corporate side and Wall Street goes whacky. Whatever this is, it is not capitalism, and the results speak for themselves. Due to human frailty, things get taken too far, which is why they should be mandated out of existence. Getting off the gold standard in theory makes sense, in practice, it seems this additional flexibility has been greatly abused. Which is seemingly what always happens throughout history.
The trillion dollar question is what does this all mean in practice for equity prices. I would say the question is no longer where the Fed Put is, but where the Fed Hammer intends to take things? Don't fight the Fed right? They are telling you they want to drive asset prices down:
* They may cave after a 10% move down, if that even happens, because nobody takes them seriously anymore and expects the Fed to reverse course at any second, because they have lost all credibility and the markets think the Fed is their you know what...
"This is happening because market participants expect higher short-term rates to undermine economic growth and force the Fed to reverse course in 2024 and 2025 - but these very expectations are preventing the tightening of financial conditions that would make such an outcome more likely," Dudley said.
* Having qualified this point, if equity prices don't go down, there is no reason for them to stop raising anyway, so something has to give.
* They realize that even if the average non-growth stock was down ~25% and speculative growth stock went down -50%+, they would still be expensive by historic standards and still way up and well above trendline from where things were, so who cares if this happens? Pigs get fat, hogs get slaughtered, not the Fed's problem. Focus on the mandate, and inflation cannot be ignored.
* They don't stop until meme stocks like GameStop (GME) and AMC (AMC) are trading at a discount to cash, which is probably what they are worth based on their forward prospects, and the speculators are all put out of business?
* Which might not be a bad thing, because the day traders would have to go back to work, which would help to alleviate wage pressure and supply constraints.
For now, no specific predictions from me as to which way it goes.
For the time being, the markets for all the gyrations are still calling BS on all of this stuff and don't expect the Fed to follow through. The markets have been conditioned to think the Fed will bend to their will.
The important bottom line is we have the fess up, in print, from a guy in the know that the Fed really does target stock prices. This is not good, and the proof is in the pudding. The "Wealth Effect" should not be a central policy tool, nothing good comes of it.
Relatedly, it was interesting to see Lael Brainard talking tough all of the sudden, now that she didn't get the job. She even threw out these quotes, the second of which was the most disingenuous in history as we know what Burns/Nixon actually did - one more reason monetary authorities have no cred. A little late for that realization now, isn't it?
I would say you just spent the last 20 years making the poor poorer, and the last year pouring gas on to an already overheated economy:
- Forty years ago, Paul Volcker noted that the dual mandate isn't an either-or proposition and that runaway inflation "would be the greatest threat to the continuing growth of the economy... and ultimately, to employment."
- Arthur Burns noted in the late 1960s that "there can be little doubt that poor people...are the chief sufferers of inflation."
(This commentary originally appeared on Real Money Pro on April 7. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)