March 16, 2014
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.
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