Unexpectedly Intriguing!
November 4, 2010

It seems there's more to our observations than we knew. The Fed is indeed targeting stock prices in its quantitative easing programs (HT: Mish):

Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.

With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth.

We wonder if they're using something like our model of how stock prices work to be able to tell when they need more quantitative easing and when they can ease off:

The QE Gap for Stock Prices?  S&P 500 Accelerations of Average Monthly Index Value and Time Shifted, Amplified Trailing Year Dividends Per Share, for 26 October 2010 Dividend Futures

After all, if stock prices go significantly higher than our expected range, that would be an indication that a new bubble has formed in the stock market.

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