Soothing the Markets
Dean Baker asks a good question: is it the Fed Chair’s job to “sooth markets?”
Let’s throw out a purely hypothetical scenario. Imagine that the bad news on new home sales, mortgage applications, durable goods orders, and productivity actually translates into an economy that is about go into a recession.
Now let’s suppose that the market has two types of investors. The first type are the high rollers. They move in and out of financial assets on a moment’s notice. Let’s call them “hedge funds.” The second type are naïve investors. They put money into the stock market at regular intervals and let it sit. We’ll call them middle class 401(k) investors.
Okay, now in our hypothetical scenario, because the economy is genuinely facing serious problems, the market is likely to be heading downward in the months ahead. Our hedge fund investors will likely begin to recognize this fact and dump their stock. On the other hand, our middle class 401(k) investors are likely to keep putting new money into the market.