In a broader sense, however, the stockmarket clearly matters to the Fed.
Jerome Powell, its current chairman, has repeatedly said that its policies are transmitted to the real economy through financial conditions—a term that refers to the availability and cost of funding for businesses and consumers.
Stockmarkets play a crucial role in both shaping and gauging financial conditions.
Admittedly, they play a small part in a formal sense: for instance, in one index of financial conditions created by the Fed’s Chicago branch, equity and other asset markets account for just ten of its 105 separate inputs, contrasting with the bigger weights assigned to credit markets.
But stocks reflect these other metrics.
This is especially true at times of stress.
Share prices have fallen this year as indices of financial conditions have tightened, and they have risen when these indices have eased.
Concerns about inflation only add to the market’s importance.
When share prices rise, consumers, feeling flush, tend to spend more money and companies, feeling confident, tend to hire more workers.
A paper in 2019 by Gabriel Chodorow-Reich of Harvard University and colleagues concluded that each dollar of increased stockmarket wealth lifted consumer spending by about three cents annually, while also boosting employment and wages.
For a central bank fighting inflation, a large rise in share prices would therefore cut against its efforts.
This makes for borderline hypocrisy in Fedspeak.
Sober central bankers can explain that they want “appropriate firming of monetary policy and associated tighter financial conditions” to help rectify the supply-and-demand imbalances that are fuelling inflation (as the Fed did indeed say in the minutes of its rate-setting meeting in June).
Yet it would be beyond the pale for them to declare that they want “appropriate firming of monetary policy and associated weakness in the stockmarket”—even if their meanings are closely aligned.
In a market crash that impairs the financial system, the Fed put would come back into focus.
For now, though, the sell-off has been mostly orderly.
A sustained rebound in stocks would be unwelcome for the Fed, and might well tilt it towards more hawkishness.
Investors accustomed to viewing the central bank as a friendly force must instead confront the harsh reality of a Fed call.