Federal Reserve and the Bull Markets

Author: Spencer, Roger W. and John H. Huston
This book presents discussion and analysis of the Federal Reserve’s involvement with the equity markets, with emphasis on the three major bull markets of the past century. Three chapters link equity market activity during the 1920s, 1960s and 1990s with the monetary policies of Benjamin Strong, William McChesney Martin Jr., and Alan Greenspan, respectively. The extensive use of original sources provides a description of policy dilemmas in the words of the Fed leaders themselves. A fourth chapter provides an empirical assessment of the Fed’s response to equity market developments over the three periods. In composite, the work, employing qualitative and quantitative methodology, delivers description and assessment of one of the most intriguing issues of contemporary monetary policy: the linkages that tie Federal Reserve actions to stock market activity.


“I am pleased to commend this study of the Federal Reserve and the Bull Markets over three economic eras. During my tenure on the Board of Governors, through most of the 1990s, I monitored quite closely the two-way transmission process between our actions and stock market activity. That is, the enormous growth of equities (and the associated volatility) as a wealth component commanded our attention and the effect of our policy actions could be assessed in part through the rapid feedback afforded by secondary equity markets before adjustments in product markets ... This complex relationship is only one of many that the Fed and its hundreds of economists throughout the System carefully scrutinize, but it and asset prices in general seemed to attract increasing attention over time. Consequently, I was not surprised the authors found a statistical link between equity prices and Fed policy ... The actions of monetary policymakers in the context of these markets require intensive examination and review, and I believe this book will contribute significantly to that debate.” – (from the Preface) Susan M. Phillips, Dean, School of Business, The George Washington University, and Member, Federal Reserve Board of Governors, 1991-1998

“Prices – whether of goods, services, or assets – convey information. It is the changes in relative prices that guide peoples’ actions in allocating resources to their most productive uses in a market economy. That being so, it is essential that all individual prices be free to move in response to changes in the supply of, or demand for, things ... This timely volume documents thoroughly the decisions and actions of policymakers, and the views of many of their critics. It is important to study and learn from these actual historic episodes in order that future ‘bubbles’ might not end with such costly consequences.” - Jerry Jordan, Senior Fellow at The Fraser Institute and President, Federal Reserve Bank of Cleveland, 1992-2003

“There is much current debate as to whether the Federal Reserve (Fed) should respond to stock market activity but more limited discussion of whether the Fed has responded to stock market activity. This book takes the unique approach of examining both the descriptive and statistical evidence surrounding the question of whether the Fed has responded to stock market activity over its 90 year history. The authors’ detailed analysis of the descriptive evidence and straightforward econometric models offer new insight into this important macroeconomic question, and Dr. Spencer and Dr. Huston make a substantial contribution to the literature on the Fed and stock market activity ... The question of how the Fed should respond to stock market speculation is surely an issue that policy makers will face in the future, and this book will help them learn from the Fed’s previous missteps.” Professor Julie K. Smith, Lafayette College, Easton"On the whole, this is a very enjoyable and informative book. I recommend it to those interested in the evolution of Fed independence, the development of its policy tools, and particularly, the role of the Fed in controlling speculative activity in the stock market>" - EH.NET (Economic History Services)

Table of Contents

Preface by Susan M. Phillips
1. Introduction
2. The Federal Reserve and the Equity Markets: The Early Years with Benjamin Strong
3. William McChesney Martin, Jr.: Speculative and Inflationary Pressures from the Korean War to Vietnam
4. Alan Greenspan: From Brief Stock Market Crash to Enduring Stock Market Bubbles
5. An Empirical Assessment of Federal Reserve Response to Changing Equity Market Conditions: Three Bull Market Eras
6. Conclusion
Appendix 1: Literature Review
Appendix 2: Alternative Specifications