Tags: Gallo | Federal Reserve | risk | markets

RBS' Gallo: 'Fed Underestimating Buildup of Risk in Credit Markets'

By    |   Tuesday, 01 July 2014 09:00 AM

The Federal Reserve has made clear that interest rates will remain near record lows for a long time, and Alberto Gallo, head of macro credit research at RBS, thinks that's a mistake.

"The Fed is underestimating a buildup of risk in credit markets, which is threatening financial stability," he writes in the Financial Times.

The Fed has a two-pronged policy, including clear communication and macro-prudential regulation, the latter of which is designed to prevent financial instability. "Both are ineffective," Gallo notes.

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"Providing certainty about the low path of interest rates is self-defeating. It gives an even stronger green light to investors and companies engaged in risk taking. U.S. firms are adding record debt through mergers and acquisitions and share buybacks."

As for macro-prudential policymaking, its history is checkered, and it "may not work," he argues. "Most existing prudential tools target mortgage lending. In financial markets, investors can generally invent new structures to take risks and elude regulation."

Without interest rate hikes, macro-prudential policies won't be able to keep investors from taking "irrational risks," Gallo explains.

"I believe the only way to stop excessive risk taking is to signal clearly that interest rates will rise sooner rather than later, and that the music is about to stop."

Meanwhile, Stephen Roach, a lecturer at Yale University and former chairman of Morgan Stanley Asia, says the Fed's massive easing program might spark another global financial crisis.

"Monetary accommodation, to the point of ignoring the stresses and strains of financial stability and what they mean for asset markets and credit markets, is something that needs to be seriously rethought," he tells CNBC.

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The Federal Reserve has made clear that interest rates will remain near record lows for a long time, and Alberto Gallo, head of macro credit research at RBS, thinks that's a mistake.
Gallo, Federal Reserve, risk, markets
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2014-00-01
Tuesday, 01 July 2014 09:00 AM
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