Fed’s Kaplan Fears “Excessive Financial Imbalances”, Warns “We Are Vulnerable To Rapid Reversals”
by Tyler Durden
ZeroHedge.com
Nov 27, 2017
Dallas Fed President Robert Kaplan just went full 1996 Greenspan…
n an esay designed to explain “A Balanced Approach to Monetary Policy”, Kaplan included an ominous section pointing at the very significant bubbles that have been blow in recent years…
Monitoring for Evidence of Building Imbalances
As a central banker, I want to be vigilant to imbalances and distortions that can build as a result of accommodative monetary policy. I have argued that monetary policy accommodation is not “free” —there are costs to accommodation in the form of distortions and imbalances in consumer decisions as well as in investing, hiring and other business decisions. More specifically, experience suggests that the greater the overshoot of full employment, the more difficult it is to unwind imbalances when growth ultimately slows—as it certainly must.
When excesses ultimately need to be unwound, this can result in a sudden downward shift in demand for investment and consumer-related durable goods.
There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level.
It is of course possible that “this time will be different,” but as I assess the condition of the U.S. economy, I am carefully monitoring evidence that might suggest growing risks of real imbalances, which could threaten the sustainability of the current economic expansion. For example, the headline unemployment rate has fallen by 70 basis points over the past year, nearly matching the average rate of decline over the prior seven years of the expansion. If this rate of decline continues, this will further tighten labor market conditions and would likely add to excesses and imbalances accumulating in the economy.
Excesses can also manifest themselves in financial imbalances. While I would prefer to rely primarily on macroprudential policy tools to manage financial imbalances, I am nevertheless monitoring various measures of potential financial excess.
I monitor these and other market measures because I am aware that, as excesses build, we are more vulnerable to reversals which have the potential to cause a rapid tightening in financial conditions, which in turn, can lead to a slowing in economic activity. Examples of potential excesses might include:
The U.S. stock market capitalization now stands at approximately 135 percent of GDP, the highest since 1999/2000.
The Rest…HERE
