The latest Economic Letter from the Federal Reserve Board of San Francisco Sylvain Leduc, a research advisor at the San Francisco Fed, takes a look at the influence of business and consumer confidence on the ups and downs of the business cycle.  Leduc finds that consumer and business "sentiment" have "contribute[d] significantly" to fluctuations in the business cycle.  But he also points out that any examination of the influence of consumer sentiment can't exclude the impact of confidence on monetary policy:

Periods of the kind of strong confidence that drives economic booms have repeatedly generated criticisms that monetary policy fueled excessive levels of optimism by keeping policy overly accommodative. For instance, theoretical work by Christiano, Motto, and Rostagno (2006) suggests that central banks that focus heavily on inflation may end up stoking confidence-driven booms. In their model, expectations that good times are ahead lead to upward pressure on real wages as the demand for labor increases. If nominal wages adjust slowly, pressures develop for prices and the inflation rate to fall. As inflation declines below their target rate, policymakers respond by lowering interest rates. In this way, they end up fueling the boom.

The evidence presented in panel C of Figure 1 suggests instead that historically, following an increase in confidence, monetary policy becomes more restrictive as the short-term policy interest rate rises. Monetary policy attempts to damp the boom by leaning against the rise in economic activity and inflation generated by rising expectations. Similarly, a wave of pessimism translates into a more accommodative monetary stance, as the economy weakens and inflation declines.

Read  Confidence and the Business Cycle here.