Asset Prices and Federal Reserve Behavior

Abstract

The legislated goals of monetary policy are price stability and maximum employment; asset price stability is not a direct goal of monetary policy. In setting monetary policy, does the Fed also consider the level of the stock market? This paper examines empirically if monetary policy, since the October 19, 1987 stock market crash, has been influenced by high valuations of the stock market. A close examination of the data, a careful reading of the FOMC available transcripts and various econometric estimations of an augmented Taylor rule lead to the conclusion that the Fed has accommodated the high valuations of the stock market as measured by the S&P500 Index.