For release: Sept. 5, 2001
Contacts: Joe Elstner, (314) 444-8902; Charles B. Henderson, (314) 444-8311

Stock Market Should Not Be a Direct Object of Monetary Policy: St. Louis Fed's Poole

Link to speech

PEORIA, Ill. -- Should the Federal Reserve adjust monetary policy in an effort to affect the direction of the stock market? Definitely not, according to Federal Reserve Bank of St. Louis President William Poole.

"I want to make clear that I am a one-armed economist on this issue," said Poole. "My answer is no, no, a thousand times no, the central bank ought not to target the stock market itself."

Poole's remarks were part of a speech, "What Role for Asset Prices in U.S. Monetary Policy?" given to Bradley University faculty members.

"It's devilishly difficult to extract information from the stock market useful for monetary policy," Poole said. "The converse of this proposition is that any particular market move may be fully justified it is just not easy to tell. Clearly, it would be a mistake for the central bank to attempt to roll back a market move that was in fact fully justified. That is a very good reason for the central bank not to target the market directly. This is the kind of judgment the central bank should leave to market mechanisms."

Poole added, however, that his point "does not mean that asset prices are irrelevant to monetary policy and that they might not induce a policy response. The Fed may respond to stock market fluctuations because doing so is necessary to offset the effects of those fluctuations." He added, "This is a distinction with a difference. Targeting the economy and targeting the stock market per se are two very different things." However, he said, on rare occasions one or more asset markets may go into a free fall that calls for a central bank response. He cited the Fed's response in the fall of 1998 to the Russian debt default and near failure of Long Term Capital Management as an example.

Poole said he believes the Fed's main objective should continue to be maintaining a low and stable rate of inflation and contributing to sustained economic growth. Logic tells us, he said, that "pursuing a separate stock market objective means compromises of some sort on the inflation objective. Clearly, targeting the stock market might come at a high price. Once the Fed compromises on its price stability goal, inflation and inflation expectations build up."

Policy actions will affect asset markets from time to time, Poole said, "But in my view these effects ought always to be side effects of the central bank pursuing its responsibility for the general health of the economy."

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