Did the Fed’s “monetary policy experiment” fail? The recent dislocation between consumer confidence and the financial markets may indicate just that.
“U.S. consumer sentiment dropped sharply in early August to its lowest level in a decade, in a worrying sign for the economy as Americans gave faltering outlooks on everything from personal finances to inflation and employment,” – Reuters
However, to understand why I am asking the question, we have to revisit whatBen Bernanke said in 2010 to support the idea of a second round of “Quantitative Easing.”
“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. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
What he is referring to is known as “Animal Spirits.”
Animal spirits came from the Latin term “spiritus animals,” which means the “breath that awakens the human mind.” Its modern usage came about in John Maynard Keynes’ 1936 publication, “The General Theory of Employment, Interest, and Money.” Ultimately, “animal spirits was adopted by Wall Street to describe the psychological factors driving investor actions.
Specifically, Ben Bernanke realized that investors would respond to that stimulus and increase asset prices by providing accommodation.
In other words, as long as individuals “believe” the Fed is lifting asset prices higher, they take action buying stocks and driving asset prices higher. Thus, investor actions deliver the desired outcome.