Usually press reports sound celebratory when increases in stock prices follow cuts in interest rates. However, there may be no reason for celebration: interest rate cuts may cause expansions in real output, but they also may increase inflation rates. Since stock prices and the indices computed from them are nominal, interest rate cuts could increase prices and indices even if the rate cuts have no expansionary effect on real output.
In fact, we shouldn’t be at all surprised if a rate cut increases market indices.
If the opposite happens, and a rate cut spurs a fall in market indices, we should probably be very worried. That scenario signals likely falls in nominal output, which imply even larger reductions in real output.
With these comments I don’t mean to question Fed policy, but rather to suggest what I perceive to be a misconception common in reporting about Fed policy.
