The Fed Has Shifted Gears… And the Markets Aren't Paying Attention

As we noted earlier this week, the Fed is growing increasingly concerned of a bubble forming in the financial markets. Previously we noted that Janet Yellen was issuing warnings regarding this.

Now St Louis Fed President James Bullard is saying the same thing.


St. Louis Federal Reserve Bank President James Bullard said Thursday that the key risk for U.S. economy would be a bubble forming as the central bank removes monetary-policy accommodations, while he also raised concerns about financial stability in the U.S. economy.


"I don't see a major bubble right now, but one will form as we are trying to remove the accommodation in the years ahead, because that's what exactly had happened in the 2004-2006 period," Bullard told the Credit Suisse Asian Investment Conference in Hong Kong. "I do think that's a key risk going forward," he said.


Bullard related the risk to the situation in 2006, the housing prices had already started to peak at the same time as the central bank was in a tightening cycle. "Just because you are moving away accomodation doesn't mean the risk of bubble forming is going away," he said.


Bullard also emphasized that financial stability concerns are "looming large," as policy makers are thinking about how to accommodate those concerns. He said macroprudential tools, which have been strengthened, can be used to address emerging bubbles. Bullard is a non-voting member of Federal Open Market Committee this year.


Granted Bullard is a non-voting member, but his sentiments are beginning to echo throughout the Fed in general.


To whit, Bill Dudley, who is Fed President of the NY Fed and possibly the single biggest dove at the Fed, made a speech yesterday. Instead of issuing the usual “the Fed should print more money mantra,” he actually commented:



In my view, the fact that our large scale asset purchase programs affect the size of term risk premia globally is important.  This set of monetary policies affects financial asset prices in a different way compared to changes in short-term interest rates, and we should be humble about what we claim about understanding the importance of this distinction…  There is, of course, the argument that Fed policy has been too accommodative for too long, creating risks for financial stability worldwide.


Bill Dudley is never going to say that the Fed has made mistakes or created bubbles. So the fact that his comments indicate that he is thinking about financial stability is highly significant.


These kinds of changes in Fed policy are never blatant. You have to dig deep to find the hints that are being dropped. And it’s clear the markets have yet to fully digest these shifts in Fed tone.


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Best Regards

Phoenix Capital Research