A Fed bias investors have learned to exploit.(Federal Reserve)(Brief Article)

Pensions & Investments, November, 2000 by Balder, John M.

Investors now view monetary policy ease as an elixir for all that ails. Every time the Federal Reserve steps in and eases to stabilize asset prices, investors breathe a collective sigh of relief. The Fed's decision to intervene in a crisis, but not conversely when market conditions are overheating, has introduced a bias that investors exploit.

Intervention on the downside puts in place a floor, but the failure to tighten when an asset price bubble-investment boom is evolving creates a one-way game (``Heads I win, tails someone else loses''). It is in part the absence of intervention while markets are overheating that creates pressure to intervene when market conditions deteriorate. The parallel existence of an investment boom-asset price bubble with...

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