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Federal Reserve members have been expressing concern that the stock market is acting in an irrational manner. This is the same concern Alan Greenspan had when he was in the middle of his disastrous leadership of the Fed back in the late 1990s.
Irrational exuberance, Greenspan called it. And we all learned our lesson when stock prices collapsed during the dot-com bubble. Even worse, Wall Street’s misbehavior and miscalculations by the Fed led to all the problems in 2007 and 2008.
So what can the Fed do now to get its power back? What can Fed boss Janet Yellen do to make Wall Street behave?
It hasn’t happened since Paul Volcker was Fed chairman in the 1980s, but a surprise, between-meeting rate hike would do the trick. As I’ve been saying, the Fed has little reason to raise rates in the first place because the economy is still weak.
But it needs rates higher so they can be lowered when the economy tanks again. If the Fed happens to get even a short period of reasonable economic growth, an unexpected rate hike would shock Wall Street back into obedience.
I’m not saying this is going to happen. I’m just saying that it has happened before.