Unloved Bull Markets

Chapter 6The Federal Reserve and Monetary Policy

Let's begin this chapter with a phrase you may have heard or read during the bull market. In a Bloomberg Businessweek article, August 12, 2019, Christina Lindblad wrote, “But the government controls the dollar printing press, so it can't go bust.” You may have heard such an expression from professional money managers who thought the low interest rates were phony, fabricated, and dangerous and believed that the expansive monetary policy would ignite inflation. They would state “the Government is just printing money.” Of course that statement is totally wrong. The Fed is not part of the government. Think of it as a club that banks join. It was intentionally designed to be separate from the government. Through monetary policy, it can influence the growth of the money supply, which is defined to be currency and demand deposits (checking accounts). The US Treasury Department, which is part of the federal government, prints currency and mints coins and has nothing to do with increasing or decreasing the money supply. The Federal Reserve is not the government. The Treasury does not control the money supply. Now that we know that the government does not print (increase the supply of) money, let's see what the Fed does and what role it played in the bull market.

The Federal Reserve was created in 1913. With regard to monetary policy, it has two, sometimes conflicting, mandates of full employment and price stability. In other words, we ...