Bullard’s Bubble Warning: “I Could See This Getting Away From Us”

While it has been a relentless jawboning session from various Fed speakers this morning, what caught our attention was an interview between CNBC’s Steve Liesman and the Fed’s recently converted uber-dove, St. Louis Fed president James Bullard on the topic of Fed mistakes, policy and “unintended” consequences such as asset bubbles.

When asked what he thinks about bubbles in risk assets, and specifically if the Fed’s ultra low rates have caused them, Bullard says “the Fed model has nothing about asset price bubbles, most models don’t have anything about that”, and as a result no Fed model ever forecasts asset bubbles, which incidentally explains why the traditional side-effect of Fed policy over the past decade has been, drumroll, asset bubbles. When Liesman continues to press, Bullard says that any opinion on the issue one “has to make a judgment.” So when asked “what is your judgment” on asset bubbles, Bullard replies “I think we are on the high side of fairly valued, I could see the process getting away from us, maybe tech stocks, maybe others.” 

As to his “judgment” on the global bond bubble, he justifies it with a “big liquidity premium globally and that is pushing the yield lower. For forecasting purposes, do you think that is going to turn around any time soon, no – so you should take that as a parameter and then go ahead and make the right policy.”

Finally, while Bullard does not see the Fed’s credibility being hurt by creating asset bubbles which its model does not account for, what he does see as hurting Fed credibility is its high forecast of future rates, i.e., forward guidance and the dot plot “and that’s affecting global pricing. We want to allign that with what’s a more realistic assessment of what’s going to happen over the forecast horizon.”

Finally, when Liesman prods him that the Fed’s dots keep sliding to where the market’s assessment of future rates will be, implying that the market is right and the Fed is wrong, Bullard’s response is that “the market agrees with me.” Which means it’s only a matter of time before Yellen also agrees with the market, at which point one can kiss the Fed’s “tightening” cycle goodbye.

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