Federal Reserve Reservations

Do Fed officials make good stock market analysts?

Source: Wikipedia

That’s what I wondered when I read Ben Bernanke’s market musings in his latest blog. He argues that a stimulative Fed hasn’t really juiced stock prices; rather, the Fed’s actions have just returned the stock market to its pre-crisis trend. This is in contrast to current Fed Chair Janet Yellen, who noted last month that she thought valuations were quite high.

This Fed-Chair-as-Market-Guru discussion reminds me of 1996, when Alan Greenspan wondered aloud what the central bank should do when it sees the stock market head toward levels of “irrational exuberance.” The market sold off the next day, but soon resumed its upward trend in the strongest bull market ever. If you had followed The Maestro’s advice and got out at that time, you never saw those levels again—even after the tech meltdown.

Source: Business Insider

What the current Chair thinks about stock prices can be important, especially if the Fed is worried about systemic distortions. Tighter monetary policy can give the market heartburn, especially if it slows the economy. That’s what the market feared back in 1996. But when Fed officials make general, non-policy observations, their sentiments should be weighed along with everyone else’s.

Because when it comes to market opinions, everyone has one. Our opinions are our windows on the world. It’s good every now and then to look at things through someone else’s glasses.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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