Greenspan's Fed reacted exclusively to the drop in the stock market.
Over the years, the Greenspan Put has morphed into the Fed Put, with successive Fed chairmen employing the same techniques as Greenspan in propping up stock prices, namely, loosening monetary policy at any hint of a downturn by injecting liquidity and lowering interest rates while jawboning the markets so as to settle nerves and allow institutional speculators to front-run such policy.
Sensing the continuation of the Fed Put indefinitely, stock markets soon reached valuations not seen since the dot-com bubble of 1999 and capital markets across the board bid up valuations to all-time highs.
A study published in 2020 determined that not only does the Fed respond directly to stock market declines-particularly since Greenspan's tenure in the 1990s-but such concerns are explicitly discussed in FOMC meetings.
The structure of the Fed documents allows us to measure how frequently actual decision makers at the FOMCmention the stock marketthese mentions are strongly predictive of future policy and do so in an asymmetric way: mentions of stock market declines predict monetary easing, whereas there is no relationship between mentions of stock market gains and tightening.
The statistical fact is that, since the mid-1990s, the Fed has tended to lower rates by an average of about 1.2 percentage points in the year after a 10 percent stock market decline.
After decades of coddling stock market speculators, crony bankers, and politicians greedy for asset bubbles to appease their voter base, the Fed is now stuck with an economy that lacks durability, to put it mildly.
https://mises.org/mises-wire/markets-made-glass-how-fed-destroyed-economic-resilience
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