Both in the US in the early 1930 s and in Japan in the early 1990 s, low interest rates did not prevent a plunge in share prices because investors either did not want to increase their debts or could not increase their debts. The need to make choices. Not only can t the Fed prevent a crash in the stock market, there comes a time when the Fed with the support of the government will stand pat while share prices plunge or might even encourage the decline in share prices. Economics as well as politics is about making choices. The major goal of any government is to govern.
Economic chaos interferes with the ability of governments to govern.
If attempts to prevent a plunge in share prices result in the enhancement of economic chaos then the central bank, being part of the government, will choose to let share prices plunge rather than create economic chaos by manipulating share prices. The Fed won t be forced to make these difficult decisions, unless it is obvious to all that the conditions in the economy and in the financial markets are such that a continuation of present policies will ruin the economy and the social fabric of society. Central bankers and politicians will tend to postpone such difficult decisions until they are forced by the markets to choose between a managed catastrophe and uncontrolled economic and political chaos. Too late for the Fed to act now. Once a central bank has allowed a bubble in share prices to develop, it becomes very difficult to deliberately pop the bubble .