Fed Staff Show Less Asset Price Worry as Bond Buying Is Debated

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Federal Reserve staff exhibited less concern this month about the risks that rising asset prices pose to financial stability, even as the stock market continued to gain ground.

At the Federal Open Market Committee’s Nov. 4-5 meeting, staff judged that asset valuations appeared “moderate,” after accounting for the low level of interest rates, according to minutes of the gathering released on Wednesday.

That was a change in wording from their last published appraisal in July, when they characterized asset valuation pressures as “notable.” The different description came despite a roughly 7% rise in the S&P 500 stock market index and a 20 basis-point increase in the yield on 10-year U.S. government notes between the two meetings. Stock prices have risen even further since then, reaching record levels this week.

Fed Staff Show Less Asset Price Worry as Bond Buying Is Debated

The Fed’s assessment of financial stability risks can play a role in determining the stance of monetary policy. Some policy makers might be reluctant to provide more stimulus to the flagging economy through bond purchases if they thought it would lead to price bubbles and extreme leverage that could hurt output even more in the future.

In an attempt to combat the damage to the economy from the pandemic, the Fed has cut short-term interest rates effectively to zero and brought trillions of dollars of bonds -- an ultra-loose monetary stance that some investors identify as a key reason behind the stock market’s meteoric rise since March.

At this month’s meeting, Fed policy makers discussed providing more guidance on their bond-buying strategy “fairly soon,” though they didn’t see a need for immediate adjustments.

Events since the gathering have continued to keep the case for action in the spotlight, even if officials have declined to clearly signal it is in the cards next month. The economy is enduring surging Covid-19 infection rates and the Trump administration last week declined to extend several Fed emergency lending facilities that the central bank publicly lobbied to keep on the books.

Fed Chairman Jerome Powell in the past has flagged the dangers that excessively elevated asset prices and other financial vulnerabilities can pose to the economy. In 2007, it was the bursting of a housing market bubble that took the economy down. In 2001, it was a collapse in stock prices that helped lead to a recession.

Lately though, Powell has sounded less concerned. In a Sept. 4 interview with National Public Radio, Powell declined to comment on the level of the stock market but did argue that low interest rates don’t necessarily lead to asset bubbles.

Noting that rates are depressed in part because of increased savings by an aging population and muted inflation, Powell said, “To that extent, there’s no reason why that would lead to, you know, excessive asset prices, for example, in stocks.”

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