The expectation of [a "Fed put"] is dangerous because if investors believe it exists they will view the equity market as less risky. This will cause investors to push equity market values higher, increasing the likelihood of an equity market bubble and, when such a bubble bursts, the potential for a sharp shock that could threaten financial stability and the economy.Look, lazy cynics (which, frankly, on the topic of finance covers a lot of people) think the Fed sits around watching the ticker tape every day to cover the backsides of Wall Street cronies. Which, just right off the bat should strike everyone as a %*#($ing stupid thing to believe, coming out of a decade that saw two separate equity market contractions of 50%. If they are trying to cover the butts of Wall Street cronies, they are pretty freaking bad at it. So, as one fledging member of "Wall Street", let me go on record and say to the FOMC, if the last 15 years have been a secret attempt by you to line my pockets, please, for the love of Pete, stop.
But, I don't think any serious people think they do this, or that they should do this. In fact, I don't even think they can do it. When you think about it, the inflation hawks are haunted by a spectre of the high inflation of the 1970's because excessively loose monetary policy was not good for capital.
But, why stop here. So many people think we have a bubble now and think the Fed is too loose now. Maybe we need an equity risk premium of 10%. Who says that 5% is safe enough? The S&P500 is up to 2000 points. That means it has 2000 points to fall. Maybe we should get that risk premium up to 10%, then the S&P 500 would only have 1000 points to fall. There would be a lot less bubble risk.
For that matter, we're in the range of full employment. People could get too used to having plentiful work. They'll start spending all their wages like the proverbial grasshopper. It's a labor bubble. Better to get unemployment back up to 9% or 10%. It builds character. You let people see a little sunlight and they just get soft. They've got no sense. Save them from themselves. You've heard of people who grew up in the Great Depression, and to their dying days they hid all their savings under the mattress and refused to spend money on trifles? That's what a good monetary policy can do. It's like a structural reform that is built in for a generation.
Even many people who are calling for more Fed accommodation bemoan the booming stock market. All the gains are going to Wall Street, they moan. It seems that 90%+ of this country is convinced that success is failure. Those bemoaning Wall Street's success are wrong in about 1,000 ways. I will describe two.
First, in an age of heavy share buybacks (which is not a problem), using the published stock market indexes is not a good measure of equity market growth over time. Buybacks are a return of capital, like dividends, but over time they are accounted for as capital gains, not capital income. So, historically, equities tended to throw off about 5% annually in dividends, but today, only about 2% is paid as dividends, and the rest goes to buybacks. (And, no, this doesn't somehow secretly line the pockets of the CEO. If that's what you think, you've been listening to lazy cynics.) So, that 2-3% adds to the level of the index, whereas dividends do not. Here is a graph showing what the S&P 500 index would look like if all cash was still returned to shareholders via dividends. These are annual numbers, ending in 2013. At the current level, just above 2000, the adjusted S&P 500 level would be just over 1200, about where it was at the peak 14 years ago. So, subtracting out the return of capital, which was not significantly different, in total, than its century-long total level, equity owners have not seen any nominal capital appreciation in 14 years! (But, all the gains in this economy are going to Wall Street! Right?)
And, secondly, if the stock market is rising because of falling equity risk premiums, then that is literally the result of capital owners demanding less cash in return for their investment. It's not "trickle down". It's math. A low equity risk premium means that the stock market will be higher and that more corporate returns will be going to laborers and creditors. When (if) the equity risk premium falls, real wages will be rising when it does. This is true even over the longer term, shown in this graph, which is kind of another version of the first graph, above.
In fact, this graph will probably show up in one of the upcoming housing posts, because this issue with risk premiums gets tied up in home values in an interesting way. I'm still working out exactly how. But, clearly homes have pricing behavior similar to low risk, inflation-protected securities. Home prices have been high when the risk premium has been high. And, the Fed is treating high home prices as a sign of risk taking!
But, maybe I'm being too hard on the Fed and Mr. Dudley. These nutty positions are basically consensus positions right now.