This Bloomberg article caught my eye:
Donald Trump loves to bash Jerome Powell, blaming him for the market meltdown. And while people can debate if the hectoring is a good idea and whether the Federal Reserve cares about stocks, it’s getting harder to argue the president is totally wrong.
Signs of Fed-fomented stress are everywhere, from slumping bank stocks to the 33 percent plunge in home builders since January. They’re in the market’s newfound willingness to differentiate between defensive and cyclical stocks, a bias absent from past meltdowns. They’re in the giant yawn greeting stellar earnings, evidence investors have something else on their mind.
The fundamentals are strong, goes the refrain, and the economy can absorb some tightening. But with eight rate hikes in the book already and more to come, it’s obvious many investors are feeling otherwise.
I can’t agree with the “it’s obvious” in the final sentence. When it comes to equity markets and monetary policy, it’s usually hard to establish a link without high frequency data showing an immediate market reaction to news about Fed policy decisions. It’s true that stocks are somewhat correlated with monetary policy, but stocks are also correlated with lots of other factors that might impact corporate profits.
Later in the same article we get a more defensible claim:
[W]hile stocks are clearly their own animal, all hair-trigger volatility and bloated valuations, the possibility they are acting as a warning signal for the rest of the economy shouldn’t be discounted.
“Shouldn’t be discounted” is much better. Stocks are one of many factors that should be considered when setting monetary policy. But this raises another question. If the Bloomberg reporter is correct that market signals are useful to monetary policymakers, and I think she is correct, then why don’t reporters spend more time discussing the need to create a highly liquid NGDP futures market? I see lots of articles discussing the need for better policies in areas like health care, global warming, housing development, occupational licensing, inequality, and other areas of concern. So why isn’t there a clamor for a better market indicator of aggregate demand?
It’s not just Bloomberg; lots of media outlets discuss the relationship between the stock market and monetary policy. Far fewer discuss the relationship between TIPS spreads and monetary policy. And still fewer discuss the need for a direct market indicator of aggregate demand expectations. And it’s not just ideology; both the left and right wing media are equally silent on this issue.
Sad.
READER COMMENTS
Don Geddis
Oct 29 2018 at 7:22pm
Surely that’s all because those reporters (and their viewers) care about the stock market first; monetary policy is only interesting (to them), in so far as it affect the stock market.
So a story about other, non-stock market, things that affect monetary policy, simply has no interest.
Alan Goldhammer
Oct 30 2018 at 8:29am
Some portion of the volatility in the stock market is a result of high frequency trading. It’s difficult to measure how much. Most retirement funds that are in equities tend not to be frequently traded. There is also a large reaction to quarterly earnings reports even if they are off of consensus expectations by a penny or two. Attributing drops or gains to any single factor is a fool’s errand. One needs to be very circumspect in assigning ‘blame’ to market swings barring a catastrophic event (e.g., the Lehman bankruptcy in 2008, but even this was a function of multiple other factors).
Benjamin Cole
Oct 30 2018 at 8:43am
“then why don’t reporters spend more time discussing the need to create a highly liquid NGDP futures market?”–Scott Sumner.
Good question, and some of it has to do with the inscrutability and mystery of the Fed. Only a small subset of financial reporters probably understand the Fed. I am not sure I do. As the Fed is independent, it does not generate policy discussions during presidential debates, etc.
Sumner recently did the math, and the much-headlined “trade war” is rather small in relation to GDP. More like a trade tiff. Yet headlines galore, and even within EconLog huge amounts of coverage of the “trade war.” The very pinnacles of righteous indignation have been scaled, and surmounted!
Much more important to GDP growth than trade issues is monetary policy, and then domestic property zoning.
Perhaps EconLog can lead the way. Maybe financial reporters will catch on. But if even the best economics blogs are blah, blah on trade wars 24/7….
Sheesh, even getting a hat-tip from Tyler Cowen on NGDPLT is rare…can we expect financial reporters to be ahead of Cowen?
At one point I tried to get Ken Duda up to doing some PR for Market Monetarism….
Alex
Oct 30 2018 at 10:49am
I ask this half-jokingly, but do you think CNBC’s Jim Cramer is for all intents and purposes a market monetarist?
I was just reading a CNBC article on how he sees this market as similar to the one leading up to 2008 and wants the Fed to take a little pause.https://www.cnbc.com/2018/10/29/cramer-this-market-reminds-me-of-some-of-the-worst-declines-ive-seen.html?__source=yahoo%7Cfinance%7Cheadline%7Cstory%7C&par=yahoo&yptr=yahoo
It also led me to this https://www.cnbc.com/2018/08/03/11-years-later-jim-cramers-they-know-nothing-rant.htmllink of his 2007, “they-know-nothing” rant, which proved particularly prescient.
Scott Sumner
Oct 31 2018 at 1:35am
Most people don’t recall this, but a rant he did in late 2008 is actually much more accurate.
Thaomas
Oct 30 2018 at 11:23am
I think one way of generating more talk about NGDPL targeting (or even making PL targeting the definition of “stable prices” in the current dual mandate) would be to point out specifically what the Fed would/should be doing (or should have done at critical junctures in the past) if they were following that policy.
Alex
Oct 30 2018 at 1:47pm
One other question: How might one distinguish the effects of expectations of a (1) tightening monetary policy and (2) a worsening trade war in the context of the (a) stock market, (b) TIPS spread, (c) USD FX rate, (d) commodity prices, and (e) long-term interest rates?
(1) I suspect that if a tighter monetary policy outlook:
(a) falls
(b) falls
(c) appreciates
(d) falls
(e) falls
(2) Worsening trade war:
(a) falls
(b) rises
(c) uncertain
(d) rises
(e) rises
Just trying to extract some signals…It looks like in the last week or so, the movements appear to be monetary-related.
I should also qualify that even if #2 is the initial cause, a negative AS shock might compel the Fed to mistakenly tighten and so that may end up dominating.
Scott Sumner
Oct 30 2018 at 2:11pm
Alan, You said:
“Some portion of the volatility in the stock market is a result of high frequency trading.”
Then why were stocks more volatile before high frequency trading?
Alex, It’s not obvious to me that a trade war (which slows growth) would make commodity prices and bond yields rise.
Alex
Oct 30 2018 at 3:09pm
“It’s not obvious to me that a trade war (which slows growth) would make commodity prices and bond yields rise.”
My thought process was that if supply chains are anticipated to be greatly disrupted, it raises the expected cost of production.
Or in other words, a trade war that was anticipated to be prolonged would reduce potential RGDP growth because of supply-chain disruptions and less gains from trade/specialization being realized. If you have stable aggregate demand growth (big if off course), then inflation ends up higher.
If people anticipate such an event to be more likely today, commodity prices rise today, inflation expectations also rise, and long-term yields rise (because of higher inflation expectations).
bill
Oct 30 2018 at 3:08pm
Contra Shiller, I think the stock market is amazingly calm, not amazingly volatile. I work in commercial real estate. I asked some co-workers to value particular properties on a Friday. On Monday, I said to value them again without looking at your work from last week. Nothing had changed but the values moved by about 5% on average. And that’s without, for instance, a bid-ask spread. Supply and demand in a liquid market will lead to some price volatility. But markets clear and that’s what matters.
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