Wild swings in asset prices have produced two recessions in the last 15 years – and, we suspect, FOMC members are keen not to see a repeat of the collapses of the last decade. As the following chart shows, measured relative to an equally nominally inflated USD-based disposable income, the wealth effect is nothing like as strong as some suggest and indeed it should be clear that time after time in the last 20 years we have seen the artificially blown ‘wealth-effect-creating’ bubbles implode back to what was an old-normal level of ‘sustainable’ wealth (and in fact the Fed is having to work harder to keep us from that level).
As Barclays notes,
There is no major asset price that could be considered depressed in any way and the rate of asset price inflation has been extremely high by any historical standard. Prior to the recent correction, household net worth as a percent of disposable income – a rough measure of asset prices – had risen by 80% as much as it did during each of the two recent asset price booms (and by twice as much as had occurred in any other post-WWII cycle).
Against a background where increasingly wild swings in asset prices have been the key factor undermining economic performance – producing two recessions in the last 15 years – it is not surprising that most members of the FOMC see that historically extreme measures aimed specifically at boosting asset prices have pretty much served their purpose.