by Robert Blumen
QE (quantitative easing) is the primary means that the Fed uses to cause asset price inflation. “The Ben Bernank,” Fed governor at the time, later chair, in an October 2003 speech endorsed the use of monetary policy to create wealth effects.
easier monetary policy not only raises stock prices; as we have seen, it also lowers risk premiums, presumably reflecting both a reduction in economic and financial volatility and an increase in the capacity of financial investors to bear risk. Thus, our results suggest that easier monetary policy not only allows consumers to enjoy a capital gain in their stock portfolios today, but it also reduces the effective amount of economic and financial risk they must face. This reduction in risk may cause consumers to trim their precautionary saving, that is, to reduce the amount of income that they put aside to protect themselves against unforeseen contingencies. Reduced precautionary saving in turn implies more spending by households.
In central banking doctrine, wealth effects are one of the channels by which Fed policy affects macroeconomic activity.