Why the Fed No Longer Watches the Stock Market

Something really good has happened with policy makers this year. The Federal Reserve is now attributing more weight to the real estate market, and less weight in its policy making to the stock market. This is good news for investors.

For a number of years now, Alan Greenspan has been very wary of the central bank’s impact on the stock market. He, and the rest of the Board, went to great lengths to communicate monetary policy in a manner that would not provide any surprises to the financial markets.

Now, to our great benefit, the central bank is less worried about stocks and more worried about the housing market. Thank goodness for that!

In the current environment, I think the impact of further changes in interest rates on stocks will be less so than in previous years. The important economic force to get right over the next 12 months is the housing sector. The stock market isn’t going to cause a recession, but a housing crash most certainly would.

There are musings now among Board members of the Federal Reserve that interest policy is now about right. The willingness to keep raising short-term interest rates is diminishing, and this is good for the stock market, the economy, the real estate market, and just about everyone.

It’s always a delicate balance with interest rate policy. You don’t want the economy too cold or too hot; you want it just about right with reasonable price stability.

Despite being in a commodity-fueled inflationary environment, I think the Federal Reserve is doing a great job managing the whole system. Going forward, however, the stock market’s movements will be nowhere near as important as market values in the real estate market.