The Federal Reserve has apparently assumed a third mandate to supplement its acknowledged dual mandate of maintaining a stable currency and promoting maximum employment. Recent actions confirm their perceived responsibility to include support of stock prices, even at historic highs.
In May 2013, when the Bernanke Fed first indicated its eventual intention to reduce the Fed’s massive bond buying program, stock prices beat a hasty retreat. That response was obviously unacceptable, and several Fed spokespeople stepped forward in short order to assure investors that the Fed was far from abandoning them.
Prior to this week’s Fed meeting, market commentators speculated that removal of the “considerable time” phrasing from the Fed’s communique would receive a frosty reception from Wall Street. Not willing even to slow the inexorable advance of stock prices, the Yellen Fed retained the “considerable time” wording. That choice became somewhat comical during Chair Yellen’s post-announcement press conference, when she was questioned about the current meaning of “considerable time”. She made it very clear that the Fed’s decision about when to begin raising rates was not tied to the calendar. The decision was completely data dependent. What, then, did “considerable time” mean? Apparently nothing. It was just included so as not to upset Wall Street, which had announced that its removal would be a trigger to sell.
Past Feds have been broadly guided by the principle that they were responsible for pulling away the punchbowl when the party was in high gear. The current and recent past Feds seem to be operating with the intent of letting party goers drink so fully that they will be sufficiently inebriated they will not notice when the punchbowl is ultimately removed.