Credit Bubble Bulletin – Doug Noland
Friday, June 23, 2017
June 23, 2017: Washington Finance and Bubble Illusion
June 18 – Financial Times (Mohamed El-Erian): “In hiking rates and, more notably, reaffirming its forward policy guidance and setting out plans for the phased contraction of its balance sheet, the Federal Reserve signalled last week that it has become less data dependent and more emboldened to normalise monetary policy. Yet, judging from asset prices, markets are failing to internalise sufficiently the shift in the policy regime. Should this discrepancy prevail in the months to come, the Fed could well be forced into the type of policy tightening process that could prove quite unpleasant for markets.”
I’m not yet ready to move beyond the recent focus on global monetary policy. Belatedly, the Fed has become “more emboldened to normalise monetary policy.” Global policymakers may finally be turning more emboldened, though taking their precious time has nurtured alarming market complacency.
Over a period of years, securities markets became progressively more emboldened to the view that higher asset prices were the top priority of global central banks. For years I’ve argued that this is one policy slippery slope. For good reason, markets do not these days take seriously the threat of a tightening of financial conditions. The Fed and fellow central banks will surely seek to avoid what at this point would be a painful development for the global securities markets. When faced with a well-established Bubble, the notion of a painless tightening of financial conditions is a myth. (more…)