Two Fed Presidents Warn Markets Getting "Frothy", Valuations "May Come Down"

Tyler Durden's picture

In what was the clearest sign to date that the Fed is targeting the stock market bubble with its rate hikes (recall two weeks ago Goldman caused a stir when it suggested that the Fed had made a policy error by being overly dovish with its rate hike, which instead of tightening financial conditions, had the effect of a 25bps rate cut), today not one but two Fed presidents warned that the market is getting "a little rich", that "valuations may be a little frothy", and that the record "wealth to income ratio is a reason to keep raising rates."

First, it was Boston Fed president Eric Rosengren who during an interview with Bloomberg, said some asset markets are "a little rich", with an emphasis on commercial real-estate valuations, which he said are “pretty ebullient." And while the Boston Fed president repeated what Neel Kashkari told Zero Hedge last week, when he said that "stock market values aren’t a driving force for monetary policy", he made it quite clear that one of the reasons why the Fed is pushing with as many as 4 rate hikes in 2017 is precisely to push stocks lower, saying that "rich asset prices are another reason for the central bank to tighten faster."

Achieving the gradual deflating of asset prices would likely require more rate hikes than the market is currently pricing in, and Rosengren hinted as much when he said that four hikes in 2017 may be needed to guard against economic overheating,

Then, it was San Fran Fed President John Williams's turn, double down on the caution saying stock market valuations “may be a little frothy in that way, and come down” on fiscal policy disappointment.

Suggesting that the market is overvalued, Williams told reporters during a Q&A in New York that “I do think that the market’s perceptions of what’s going to happen ... kind of got ahead of reality” on fiscal policy. Williams also echoed Rosengren saying he “would not rule out more than three increases total for this year.” The median estimate of Fed officials in their mid-March forecasts was for three quarter-point rate increases in 2017.

Williams also warned those who are confident that the Fed will not sell Treasuries saying that the Fed can begin shrinking balance sheet before knowing size it should ultimately be: “We could start a normalization of the balance sheet and then make a decision, do we stop at X or Y.”

“I think the floor system has been effective” for controlling short-term interest rates and it’s “not that critical” which one Fed uses in the future because it has shown it can control rates with both floor and corridor systems.

In effect what the Fed is hoping to do is to avoid a flattening or even inversion of the yield curve by pushing short rates higher while selling long-dated treasuries, in effect prompting an even more aggressive selling in the long-dated part of the curve, in effect undertaking a parallel curve shift, or even one where the curve steepens further. As a reminder, this is something the BOJ is currently attempting with its "Yield Curve Control" program.

That said, “we’re not at that point yet” where we can communicate what size we think it will be in the end.

But while Williams emphasized the it is the strong economy that gives him confidence that the US can sustain 3 or more rate hikes in 2017, which is surprising because as we have repeatedly shown, the bulk of the economic improvement has been only as a result of sentiment and confidence surveys...

... and not in terms of actual hard data, Williams let the real reason for the Fed's sudden rush to hike rates slip when he said that the "growing wealth-to-income ratio is another reason to keep raising rates."

Williams was referring to the following chart we showed three weeks ago:


... a chart which clearly shows that at least when looked at on a "wealth-to-income" ratio - which now is at an all time high - assets are above the peak-bubble levels that marked both the Greenspan and Bernanke peaks.

So is the Fed suddenly, finally, worried about the consequences of its bubble-reflating actions over the past 8 years? If so, good luck trying to put that particular genie back in the bottle, and "deflate" risk assets in a calm, cool and collected manner. In any case, if indeed the Fed is hoping to orchestrate a market drop, it will be a useful and timely test of Kashkari's statement from last week, when the Fed president said a "stock market drop unlikely to trigger crisis."

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SloMoe's picture

So, the squid is short spoos?

NoDebt's picture

But... but... permanently high plateau.


MrSteve's picture

I'm mightily pleased with a chicken in every pot and a car in every garage; happy days are here again! the skies above are clear again!!

With retail REITs walking away scot-free and leaving creditors to sort out their bundled bonds' losses on collateralized ghost malls, what is to worry about? Default ain't mine, to quote an old Detroit bumper sticker slogan.

What is it, that which is king in a depression?

American Psycho's picture

Getting frothy?  They done got frothed!! Yes, that sentence is grammatically correct. 

GUS100CORRINA's picture

Two Fed Presidents Warn Markets Getting "Frothy", Valuations "May Come Down"

My Response: Really ... you think? P/E of 30+ ... why not 40 or 60 or 100?

What a bunch of losers with degrees.

===== My Fair Value Numbers =====

Below is information that I recently created for myself to ground my expectations. It is an educated guess based on earnings growth (or lack there of) and market valuation measures.

All of the most recent market data and politcal events are suggesting that a near-to-medium term market reset to fair value might be in order. So what are we talking about when we say fair value? Below is my list of fair value numbers:

S&P500 --> 1,500-1,600

RUSSELL 2000 --> 900-1,100

NASDAQ --> 4,000

DOW --> 15,000-16,000

Just one person's humble opinion based on fact that earnings have 'FLATLINED' since 2014! Of course, all of this presumes that the CBs will allow the market to be the market and not intervien like they have been doing since 2009. If this situation was to play out, it would be one rude awakening to investors and feel like a CRASH which it is NOT. Complacency is SKY HIGH along with MARGIN DEBT!

Pinto Currency's picture

Fed Presidents,
You've created $63T of total credit market debt you assholes.
Resign and speak out against the destructive impact of the Fed.

spastic_colon's picture

100% agree with your numbers; the new permantly high plateaus; we just have to go down to confirm them.

Ricki13th's picture

The DOW is only worth 13000 in my estimate.

Bam_Man's picture

In Japan the Nikkei bubble got to a P/E of around 85 before it burst in 1990.

This one could get a lot "frothier".

Racer's picture

Since when was the FED worried about over valuation of anything, especially the stawk "markets".

They must want to put the blame on Trump!

Philo Beddoe's picture

We warned you. We said frothy. Our hands are clean. 

NugginFuts's picture

haha so now when it drops 80% they can say "Ahhhhh, just right!"

BSHJ's picture THIS is why the 'markets' are at the highs of the day......

bmore's picture

Bring back Jimmy Carter years with afros, bell bottoms and young John Travolta.

Piranha's picture

funny never heard "hiking bcs of high asset prices" during Obama

vegas's picture

How about the common sense to "I haven't got a fucking clue" ratio index; add it all up among the 12 FED Twits, and you'd be hard pressed to get a number greater than 0.

RagaMuffin's picture

If DT is clever he will manage the audit to concide with the next hike. If the markets tank he will have the FED take the blame and use the audit to seal it.....

adr's picture

A LITTLE overvalued?

If 1999 couldn't support Priceline at $960 a share, how can 2017 support almost $2000?

Are there really enough people buying to keep pushing these stocks higher, or is it that there just isn't anyone buying that causes the only buyer of consequence to push them?

Must be nice to inhabit the C-Suite and be able to authorize your company to buy shares you own for more than they were worth when they were granted to you.

The Fed and the corporate buyback, expanding multiples for eight straight years.

MrSteve's picture

that's the magic of the market, as Reagan use to say...back when we had markets...

shizzledizzle's picture

(Person running blender @ 20k RPM notes that the mixture is getting frothy.) 

nsurf9's picture

And, every single dollar these stocks go up - is a dollar+ that's been stolen from the buying power of our currency. 

That's why I hate seeing the market going up - they're litterally stealing it from savers and Main Street to give it to Wall Street !!!!

NugginFuts's picture

"But....but....but..... the wealth effect!"

nsurf9's picture

Why yes, the den of thieves and vipers enjoy the wealth effect at our expense - immensely.

Perhaps the most valuable thing you can do for our children is write your senator to approve the recently passed House Bill to audit the fed and then make them rescind the Federal Reserve Act of 1913 based on a taking without due process, fraud and foreign ownership.

Houses Depreciate's picture

Housing prices are falling.


Dump that rapidly depreciating house for whatever it will fetch.

Non-Corporate Entity's picture

Unless we know how he takes his coffee, frothy could mean anything.

Houses Depreciate's picture

Prices have a long way to fall.... a very long way to fall.


Remember..... Nothing accelerates the economy, creates jobs and raises the standard of living like falling prices to dramatically lower and more affordable levels. Nothing.

pebblewriter's picture

 "a stock market drop is unlikely to trigger crisis."

To paraphrase Confucious, "a crisis is an unrecognized opportunity."

Bam_Man's picture

"We had to talk down our bubble in order to save it."

silverer's picture

Worry, worry, worry. Tell me that again after the DOW hits 30,000. Maybe something will happen that investors will believe. Like a 30 mile diameter nickel-iron asteroid strike, or some other mundane incident.

Houses Depreciate's picture

We're much closer to the top than we are the bottom(6500).

Falconsixone's picture

Frothy must be a signal word.

Do the world a favor and follow your staff to the sidewalk at free fall velocity,

50m/s should do it.


Justin Case's picture


That's putting it mildly. As long as the Gov't is levitating it, have no fear. Everyting is AWSOME! Go long on everyting, use maximum margine and re-fi the house too.

falak pema's picture

Oh the third mandate of the FED!

Lert's picture

If you think the Fed has been propping the markets for awhile now, like I do, then you would take the heed of a warning from a Fed official. He is warning us to get out now, IMO.

Sledge-hammer's picture
Sledge-hammer (not verified) Mar 29, 2017 5:56 PM

Do ya think?