domingo, 6 de julio de 2014

domingo, julio 06, 2014

July 3, 2014 6:14 pm

Janet Yellen’s asset price boom

Caution on rates is wise but Fed could do more on bubbles



They say the US Federal Reserve is for ever blowing bubbles. Janet Yellen did little to counter that view this week with her reiteration that tighter interest rates are almost always the wrong tool to curb asset price inflation.

She was right, however, to hold the line. Central banks have a poor record of anticipating asset bubbles, let alone preventing them. There is no reason to suppose that their foresight has improved. In contrast, it is within the Fed’s power to bolster the economy’s resilience to bursting bubbles via tougher macroprudential controls. Bubbles will always be with us, she argued. The goal should be to make them less explosive.

Ms Yellen is in good company. On Thursday, Sweden’s central bank reversed its stance of tightening interest rates to head off asset price bubbles by slashing them to just 0.25 per cent.

Far from rebuilding confidence, the Riksbank’s strategy of “leaning into the wind” had brought Sweden to the brink of outright deflation. In place of the blunt monetary instrument, the Riksbank will look at further toughening banks’ capital requirements.

At the Bank of England, Mark Carney has taken macroprudential policy a step further by promising to vary the loan-to-value ratio on mortgages with the housing boom cycle. Central banks everywhere are starting to vary their bank stress tests to take the asset price cycle into account.

The debate is far from settled. This week the Bank for International Settlements threw a contrarian straw into the wind by insisting that central banks should tighten early and clearly to stave off another cycle of bubbles. Ms Yellen is wise to ignore their advice. Without easy monetary policy, the US, the UK and other leading economies would have grown by far less in recent years. Premature tightening would have reduced growth, risked deflation and increased the value of the debt burden that the BIS so fears.

The BIS was right to warn of the dangers of “balance sheet depression”, which can persist for years. Alas, its remedy would worsen the disease. Without growth, the balance sheet can only deteriorate further.

That said, there are grounds to worry that the Fed is not doing enough to limit the impact of future asset price shocks. Unlike the BoE, which seems serious about counteracting the UK’s chronic housing boom-bust cycle, the Fed’s macroprudential tool kit is limited.

Ms Yellen has made it clear the Fed will increase capital cushions as conditions demand. But almost all the onus is on the formal banking sector. Much of the risk, however, has shifted into shadow banking. There are real concerns the Fed is behind the curve

Regulators are almost never as nimble as the markets they regulate. Ms Yellen must do more to demonstrate that the Fed, and its sister agencies, will follow the search for yield into whichever asset classes it goes, and via whichever entities.

On the bright side, the US economy’s strong labour market numbers in June – with 288,000 new jobs added – is another signpost on the way to ending the historically easy monetary policy of the past few years. The Fed’s taper will almost certainly be completed by the autumn. And there is a rising chance that it will begin to raise interest rates in late 2015 if not before.

For six years, the Fed has done its best to boost asset prices to rekindle the real economy. The path was ugly but undoubtedly the lesser of two evils. At some point, US interest rates will begin to normalise and the search for yield may go into reverse. 

Volatility will return to the markets and risks will rise. It is imperative the Fed makes use of every macroprudential tool it has to protect the US recovery from the bubbles it has helped create.


Copyright The Financial Times Limited 2014.

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