Fed's Dudley Is Worried About "Elevated Asset Prices", Sees "Real Risk" Of US Overheating, Hard Landing

In today's most anticipated Fed speech, outgoing NY Fed president Bill Dudley delivered keynote remarks at a SIFMA event in New York, titled "The Outlook for the US Economy in 2018 and Beyond", in which he warned bluntly that the prospect of U.S. economic overheating "is a real risk over the next few years" and cautioned that one area he is "slightly worried about is financial market asset valuations, which I would characterize as elevated."

But before algos read too much into it and decide to sell on yet another "irrational exuberance" moment, the head of the most important regional Fed immediately hedged that even a "significant" market drop would not have the "destructive impact" we saw a decade ago, to wit: 

I am also less worried because the financial system today is much more resilient and robust than it was a decade ago.  Thus, even if financial asset prices were to decline significantly—which presumably would occur if the economic outlook were to deteriorate—I don’t think such declines would have the destructive impact we saw a decade ago.

Is he right? We will let readers decide...

asd

He then reverted back to rates, saying that "I will continue to advocate for gradually removing monetary policy accommodation. As I see it, the case for doing so remains strong."

The reason for that is the same one Bank of America highlighted earlier: namely that "financial conditions today are easier than when we started to remove monetary policy accommodation." Which is precisely what Goldman warned nearly a year ago, when it said that it appeared that Yellen had lost control of the market.

 

https://www.zerohedge.com/sites/default/files/inline-images/20180111_Eod17.png

As BofA recently noted, "the current backdrop feels very reminiscent of the Greenspan era of 2004-2006. Back then US interest rates rose 17 times. Yet, financial conditions remained loose and interest rate volatility fell to very low levels precisely because Fed monetary tightening was so predictable and patient: rates generally rose by 25bp at each meeting."  

 

https://www.zerohedge.com/sites/default/files/inline-images/20180111_Eod18.png

Sure enough, to Dudley, "this suggests that the Federal Reserve may have to press harder on the brakes at some point over the next few years. If that happens, the risk of a hard landing will increase."

Dudley wasn't done, and realizing he has little to lose by telling the truth, now that he is on his way out, said that "the second risk is the long-term fiscal position of the United States." I.e. US debt.

Still, he said that "the economy is likely to continue to grow at an above-trend pace, which should lead to a tighter labor market and faster wage growth." and anticipated the tight labor market would generate wage gains and price inflation. Even if inflation does not reach objective, "that might not be a serious problem" as long as the economy "were to continue to perform well in other respects."

He continues to expect inflation to return to target over the medium term, and transitory factors to move through the inflation data. "I would be much more concerned if low inflation outcomes were contributing to a decline in inflation expectations."

He anticipated that the economy "will be getting an extra boost in 2018 and 2019 from the recently enacted tax legislation" which could lead to overheating. In which case, it would be necessary for the Fed to "press harder on the brakes"  and that “while the recently passed Tax Cuts and Jobs Act of 2017 likely will provide additional support to growth over the near term, it will come at a cost."

He added that the tax packed "will increase the nation's longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby-boom generation retires."

Stocks, predictably, have not responded one bit to Dudley's surprisingly blunt warning.

* * *

Separately, Dudley echoed the Fed's recent mantra that the flattening yield curve is not a worrisome sign, upgrade his GDP growth view for 2018 from 2.5% to 2.75%, and said that he sees inflation rising to target in the medium term whil unemployment falls below 4%.

"We should expect the yield curve to be flatter than normal in the current environment."

Naturally, Dudley did not see a recession signal at present, and reassured his audience that the "financial system today is much more resilient and robust than it was a decade ago."

To sum up Dudley's statement:

I am optimistic about the near-term economic outlook and the likelihood that the FOMC will be able to make progress this year in pushing inflation up toward its 2 percent objective.  The economy has considerable forward momentum, monetary policy is still accommodative, financial conditions are easy, and fiscal policy is set to provide a boost.  But, there are some significant storm clouds over the longer term.  If the labor market tightens much further, it will be harder to slow the economy to a sustainable pace, avoiding overheating and an eventual economic downturn.  Another important issue is the need to get the country’s fiscal house in order for the long run.  The longer that task is deferred, the greater the risk for financial markets and the economy, and the harder it will be for the Federal Reserve to keep the economy on an even keel.

His full speech can be found here.

Comments

Offthebeach American Psycho Thu, 01/11/2018 - 16:12 Permalink

Time to beat the dog, acid wash the wife's face, sodomize the kids ...but tell them daddy loves them , and its for their own good.  

Always keep the sheeple confused, and unstable.  

And to think Koresh and the kids got tear gassed and burnt in insulated oven pit for rural bumpkin laydown and less gun the the in house goons at just the NY Fed have.

In reply to by American Psycho

Davidduke2000 Thu, 01/11/2018 - 15:53 Permalink

Overheating??? it's when the real economy is running on all cylinders, but not a chance of overheating it is below zero freezing cold.

however the bankster is worried the JIG IS UP.

Consuelo Thu, 01/11/2018 - 15:56 Permalink

 

 

Read that last paragraph - then read it again...

 

And this mealy-mouthed horse-shit-on-a-stick will continue, over & over, ad-infinitum until a currency crisis brought about by forces outside the Fed's long arm of treasury recycling, bring it all down --- hard.

Ron_Mexico Consuelo Thu, 01/11/2018 - 16:37 Permalink

Ya know, I actually DID go back and reread it.  And, ya know what else?  It's the exact same crap Helicopter Ben Shalom Bernanke was shoveling 10 years ago. You remember him -- the dude who also said in 2005 that he foresaw no national bubble in real estate prices?  You are so right:  BOHICA bitchez . . .

In reply to by Consuelo

JohnGaltUk Ron_Mexico Thu, 01/11/2018 - 16:59 Permalink

Dude these guys are compulsive liars until the very end. He will be redeeming his pension as I write and taking physical delivery of gold.

History is crystal clear on this point, when the state starts to debase its own currency the collapse is not far behind, although I must take my hat off to these CB's plate spinners because they have kept it going longer than I estimated but then I didn't think for one moment they would print money, buy bonds, buy equities change accounting standards oh and don't forget about all the fraud.

2008 will look like school boys scuffle in the playground. All those snowflakes in the USA will rediscover why the founding fathers were so insistent on the 2nd amendment.

In reply to by Ron_Mexico

Byrond Thu, 01/11/2018 - 15:56 Permalink

Destroying Trump and the GOP 101:

Kill the stock rally.

Blame Trump.

Make America Suffer Again.

And legalize weed (it needs to happen anyway, but it hurts the whole GOP thang).

 

nsurf9 Thu, 01/11/2018 - 15:58 Permalink

Yeah, thieving bastard, with the stawk market leaving the solar system, its clear you didn't give a $hit about all those people freezing and starving on main street!

MK ULTRA Alpha nsurf9 Thu, 01/11/2018 - 17:01 Permalink

"...didn't give a $hit about all those people freezing and starving on main street! "

Somethings wrong Yellen is playing to the bond market now. This is because Greenspan came in a panic from London warning about a bond market collapse. This was right after Yellen and the board of governors had decided to sell off the Fed's over $4 trillion balance sheet. This action would have taken trillions of dollar liquidity out of the global economy. The dollar would be a super dollar right now instead of sinking against other currencies.

The Fed has sold off around $10 billion, that's pathetic and someone should have questioned this and written many analysis. Unfortunately we're led by the nose by NYC Jew controlled media and aren't allowed to question the Fed, banks or anything related to Jews.

Dollars need to be removed from the vast QE liquidity campaigns to give the US financial system and economy a firm footing, the Fed is using the excuse of inflation to use the interest rate method which tends to shut the economy down. Again, all the Fed had to do was state a schedule of sell off of the Fed's balance sheet. This would strengthen the US economy not shut it down.

In reply to by nsurf9

lester1 Thu, 01/11/2018 - 16:01 Permalink

Dudley is a good actor. He knows darn well the Federal Reserve will just continue to buy stocks and bonds to keep this Market propped up forever

John Law Lives lester1 Thu, 01/11/2018 - 16:21 Permalink

You have absolutely zero proof the Fed is purchasing stocks.  If you did, it would be the economic story of the decade... since purchasing stocks is contrary to Section 14 of the Federal Reserve Act.  Please offer some proof or shut up.  And, no, the stock market recovery on the day of the "flash crash" etc. is not proof of any such thing.  Your repeated claim re. the Fed purchasing stocks is almost as stupid as ongoing claims that the Apollo lunar landing missions were faked. 

In reply to by lester1

onthedeschutes John Law Lives Thu, 01/11/2018 - 16:38 Permalink

The FED can do all kinds of fancy swaps with their foreign central bank counterparts.  So while they may not violate the letter of the law by "buying stocks directly", they most definitely have been violating the spirit of the law with their swaps.  Just look at foreign central banks balance sheets...they are among the largest holders of US Blue chip stocks anywhere in the world.  Take your own advice...don't be stupid.

In reply to by John Law Lives

Clowns on Acid onthedeschutes Thu, 01/11/2018 - 17:05 Permalink

Exactly...look at the Swiss Nat'l Bank's portfolio of US stocks...$ 100 Billion worth. How much US stocks deos the BOJ own?

Look at Belgium buying all the WI UST auctions.

The Plunge Protection team exists. What do they buy and what is their equity position / inventory right now? Oh yamean ...they don't have to tell the Public?

The Fed has absolutely screwed the pooch and unscrewing the pooch just doesn't happen. It is criminal behavior, but this immoral bastard Dudley walks out the door a very wealthy man, he looks back and says ..."Geez...the S+P is rising sooo fast it might expose our fraud and theft. Slow it down at least until I buy my bunker".

 

 

In reply to by onthedeschutes

John Law Lives onthedeschutes Thu, 01/11/2018 - 17:49 Permalink

"So while they may not violate the letter of the law by "buying stocks directly..." - onthedeschutes

That was specifically what I refuted, brainiac.  Now, kindly read the following.  It was posted on ZH itself.

https://www.zerohedge.com/news/2017-03-27/two-trends-will-force-fed-sta…

excerpt:

"While the Japanese and Swiss central banks have turned themselves into hedge funds by loading up on equities, the US Fed has stuck to supporting the stock market indirectly, by buying bonds."

In reply to by onthedeschutes

John Law Lives onthedeschutes Thu, 01/11/2018 - 23:15 Permalink

The period signifies that our exchange has come to an end on this thread.  I made a factually correct statement that the Fed does not buy stocks, and you offered nothing but a baseless assertion than you can not prove.  You have not proffered an undercutting defeater to my claim, and you are wasting server space with your aimless blathering.

отвали

In reply to by onthedeschutes

JohnGaltUk onthedeschutes Thu, 01/11/2018 - 17:06 Permalink

I believe you. They are buying stocks because you are actually buying something physical and even if the company does goes bust you will get something.

With bonds, if they are sovereign they normally have no intention of honoring any of it and will be zero. The Rothschild's had a policy of never lending to monarchy because they had a very bad habit of never paying it back, governments are the same, they seem themselves as above the law.  

In reply to by onthedeschutes

John Law Lives onthedeschutes Thu, 01/11/2018 - 17:49 Permalink

"So while they may not violate the letter of the law by "buying stocks directly..." - onthedeschutes

That was specifically what I refuted, brainiac.  Now, kindly read the following.  It was posted on ZH itself.

https://www.zerohedge.com/news/2017-03-27/two-trends-will-force-fed-sta…

excerpt:

"While the Japanese and Swiss central banks have turned themselves into hedge funds by loading up on equities, the US Fed has stuck to supporting the stock market indirectly, by buying bonds."

In reply to by onthedeschutes

Don Sunset Thu, 01/11/2018 - 16:07 Permalink

So Dudley is talking about this:

...... even if financial asset prices were to decline significantly—which presumably would occur if the economic outlook were to deteriorate—I don’t think such declines would have the destructive impact we saw a decade ago. ......

And Moonbeam is talking about this:

https://www.bloomberg.com/news/articles/2018-01-10/california-s-brown-r…

It's almost as if preparations are being made for the inevitable doom and gloom.

DavidFL Thu, 01/11/2018 - 16:09 Permalink

Now that the Fed has allowed all markets to completely over run the ability to exert any control, they start to accept reality. Its too late now Mr. Dudley; where were you and the other financial wizards 2 years ago when it was readily apparent to everyone except the Fed the markets were turned into one way poker parlors?? WTF!!

Only one way out now and that is to complete the blow off top and suffer the hangover!

Easyp Thu, 01/11/2018 - 16:14 Permalink

If you want to know what is going on in the markets today then just wait 12 months and someone from the Fed will be able to explain it to you. 

If you ask the same Fed expert what is going to happen next week then they will offer you their best guess....and it will almost certainly be wrong.

JibjeResearch Thu, 01/11/2018 - 16:34 Permalink

And what are the other choices?

Bwhahah hahahaha..

Ok, fine... let's just take one more step upward.... and go sloooooooooowwwwwwwwllllllllllllyyyyyyyyyyyyyyyyyyyyyyyyyyy

 

lolz ahhahahaha