The New Fed Mandate: Full Employment & Asset Bubbles?

As recently as the 1990s, investors were forced to guess what the Federal Reserve was going to do next based on the width of Alan Greenspan’s briefcase.1

Communication from the Fed is still relatively new, maybe two decades old.

The 2008 crisis brought the Fed into the information age as Bernanke and company upped their communication game.

If that crisis was the Fed dipping their toe into the sharing age, the pandemic has turned them into your annoying friend on Instagram who shares “the most beautiful sunset in the world” every single night.

Like it or not, the Fed is extremely direct about what they plan on doing these days.

In recent weeks the Fed has made it clear they have no intention of raising interest rates anytime soon. They have an inflation target of 2% but are willing to ignore that benchmark in the interest of allowing the employment situation to markedly improve first.

The Fed’s dual mandate is price stability and maximizing employment.

They have made it clear the former isn’t as big of a worry as the latter. The Fed doesn’t necessarily control the economy but this shift in priorities will certainly have an impact on the markets and economy, whether it’s real or perceived.

I have a lot of questions:

  • Can the Fed will the economy to a faster recovery this time around versus the last recovery?
  • Will Congress get the message here that the Fed is begging them to spend more money with rates on the floor for years?
  • How low will borrowing costs get?
  • How much will people borrow in the years ahead?
  • Will low rates keep the housing market rocking for an extended period?
  • With rates as these levels for a long time are we setting up for the mother of all asset bubbles?
  • What happens if we actually get inflation? Will the Fed change their mind?
  • How long will rates stay low for? Maybe this entire decade?
  • Just because the Fed is comfortable with higher inflation, what if they don’t get it?
  • What if inflation is so difficult to measure that it’s a useless statistic for the Fed to track in the first place?

Michael and I discussed some of these questions and more on this week’s podcast:

I wish I knew the answers to these questions but the fact that the Fed is being so much more open about their intentions has to at the very least have psychological implications for investors.

Further Reading:
What If We Get Inflation But Interest Rates Don’t Rise?

Now here’s what I’ve been reading lately:

1The theory of Greenspan’s briefcase was if it was full, it meant a rate cut was coming because he needed more evidence to back up the move. If it wasn’t full, that meant no action would be taken. The 90s were a simpler time.