Earlier Alan Greenspan shared some Fed insight, explaining the diagonal rise of the stock market, which can be summarized as follows - "stock prices determine the economy, not the other way round." In one simple sentence, Greenspan demonstrates that the Fed is not only chock full of people who can't read economic textbooks good (sic) but is populated by a subset of people suffering from cause-and-effect inversion disorder (it is also chock(er) full of new and improved stock traders and algos populating Liberty 33, doing all they can to make sure that in 13 up days, there is just one down). Yet in a market which has broken all laws of rationality, is the Fed's flawed self-fulfilling prophecy gaming the only thing that the amazing American's recovery is based on? To be sure, the main reason why economic skeptics such as Rosenberg, Edwards, Janjuah, and (ever decreasing) others retain their pessimism is that while the marker has now priced in one of the most ebullient, V-shaped economic recoveries in the history of the world, the underlying economy has stagnated and even downshifted into a double dip along numerous metrics, even despite ongoing fiscal stimulus and monetary pumpatude. So what is going on? Simple - the Fed, and by implication the administration, believe that once confidence and the market reach a given level, Joe Consumer will forget that the mortgage bill has not been paid in 12 months, the credit card in 3, that all neighbors lost their jobs a year ago and still can't find a new ones, and instead will merely look at the Dow (not the S&P - for some reason government/Fed workers still don't realize that nobody follows the DJIA, but whatever) and the UMich consumer confidence, for a barometer of economic health. The fallacy of this proposition is of course beyond preposterous, but these and such are the thoughts of the Federal Reserve.
Appropriately, Goldman's Sven Jari Stehn has just published an analysis looking at whether there is a two-way relationship between asset prices and the economy (merely the latest in a long line of such queries), and most relevantly: monetary policy.