Tags: McCulley | Fed | stock | prices

Pimco Economist McCulley: Fed Seeks Higher Stock Prices

By    |   Tuesday, 09 September 2014 09:26 PM

While the Federal Reserve wouldn't dare say so in public, the central bank is in fact working hard to boost stock prices, says Paul McCulley, chief economist at Pimco.

In the old days, "the notion of the Fed targeting stock and other long-term financial asset prices was blasphemy," he writes in his September commentary. "Politically, it still is. But that world no longer exists."

With the economy stuck in a liquidity trap, Fed policy can't "generate a revival of either increased demand for or supply of bank credit and upside action for prices and wages on Main Street," McCulley says.

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So unless fiscal policy steps in with stimulus, the Fed must "dance with Wall Street," McCulley says.

"It is not a tasteful choice for the Fed at all. It reeks with social injustice. But it also happens to be the only viable choice: use all available powers, with whatever-it-takes abandon, to reflate prices that are amenable to going up: long-term bonds and stocks."

If McCulley is correct, Fed officials should be happy. The S&P 500 has nearly tripled since March 2009.

Meanwhile, many economists expect the central bank to begin increasing interest rates in the second or third quarter next year. But not Vincent Reinhart, chief economist at Morgan Stanley and a former top official at the Fed.

He wrote in a commentary obtained by MarketWatch that he doesn't expect a rate hike until the beginning of 2016.

Once the central bank signals that a rate rise is imminent, financial markets will freak out, and that will cause the Fed to hold back, Reinhart says

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

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While the Federal Reserve wouldn't dare say so in public, the central bank is in fact working hard to boost stock prices, says Paul McCulley, chief economist at Pimco.
McCulley, Fed, stock, prices
308
2014-26-09
Tuesday, 09 September 2014 09:26 PM
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