Tags: Fed | risk | markets | volatile

WSJ: Fed Officials Concerned That Buoyant Markets Might Soon Turn Volatile

By    |   Wednesday, 04 June 2014 10:19 AM

Federal Reserve officials are worried that when it comes to financial markets, this could be the calm before the storm.

The calmness can be seen in stocks, where the S&P 500 has produced a return of 5 percent so far this year, and it can be seen in bonds, where the Barclays U.S. Aggregate Index has returned 3.5 percent year-to-date.

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The VIX has sat below its long-term average for 74 consecutive weeks, The Wall Street Journal reports. That's the longest streak since 2007, prior to the financial crisis.

The stable market environment has Fed officials concerned that investors will take on too much risk. "Volatility in the markets is unusually low," William Dudley, president of the New York Fed, said after a speech last week, according to The Journal.

"I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they'll take more risk than really what's appropriate."

Richard Fisher, president of the Dallas Fed, is also concerned about complacency in the market. "Low volatility I don't think is healthy," he said in an interview Tuesday, The Journal reports. "This indicates to me a little bit too much complacency that [interest] rates are going to stay at abnormally low levels forever."

Meanwhile, Robert Auerbach, professor of public affairs at the University of Texas, says the Fed should worry about the $2.58 trillion of excess bank reserves its stimulus has created — a ticking time bomb.

"Now that the bomb has reached $2.58 trillion, some reporters and broadcasters have found a problem," he writes in an article for The Huffington Post.

"Fed officials are now talking about plans to dismantle the bomb with no troublesome side effects. Some of their announced plans are ineffectual, harmful and ridiculous."

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Federal Reserve policymakers are worried that when it comes to financial markets, this could be the calm before the storm.
Fed, risk, markets, volatile
Wednesday, 04 June 2014 10:19 AM
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