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The US Federal Reserve appears to have become increasingly concerned about asset bubbles blowing up again, particularly in equity markets.
In recent days, a number of key Fed officials have made pointed remarks about investors taking on more risk at a time when official interests rates are on the rise and the liquidity flow from bond buying programs - or quantitative easing - may be wound back.
The Fed's deputy chair Stanley Fischer told an International Monetary Fund conference in Washington that vigilance was needed as asset prices and debt were building up again.
"The general rise in valuation pressures may be partly explained by a generally brighter economic outlook, but there are signs that risk appetite increased as well," Dr Fischer said.
"So far, the evidently high risk appetite has not led to increased leverage across the financial system, but close monitoring is warranted.
"Excessive leverage and reliance on short-term funding, which may reward risk takers whose bets pay off, may also increase the risk of fire sales and contagion, creating a fragile financial situation."
In a keynote speech in London overnight, Fed chairman Janet Yellen also raised the issue.
"Asset valuations are somewhat rich if you use some traditional metrics like prices earnings ratios," she said.
Equity markets complacent
Earlier in the week, another voting member on the Fed's rate setting committee, John Williams, told ABC TV's The Business program that he was concerned about complacency in the stock market.
"If you look at the measures of uncertainty, the VIX measure, or other indicators, there seems to be a priced-to-perfection attitude out there," he said.
"The stock market still seems to be running very much on fumes."
"It is something that is clearly a risk to the US economy. Some correction there, something you have to be prepared for and respond to, if it does happen."
RBC's senior US economist Tom Porcelli said the Fed, having been burned by asset bubbles in the past, was likely to continue on its path to raise interest rates back to normalised levels.
"If markets are indeed overvalued - a view we'd argue against - the Fed's attempt to engineer a soft landing of asset prices or even prevent an overheating of these by removing accommodation is completely consistent behaviour for a committee that has been burned by bubbles in the past," Mr Porcelli said.
"The bottom line is if the Fed thinks that risk appetite is heading toward unsustainable levels that put financial stability at risk, they are more likely to stay the course on removing accommodation even in the face of softer inflation reads."
ECB also looks at unwinding stimulus
Meanwhile, the head of the European Central Bank, Mario Draghi, has indicated the ECB might start winding up its massive package of monetary stimulus.
Speaking at an ECB forum in Portugal, Mr Draghi noted the euro area recovery is strengthening and becoming broader.
"As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments - not in order to tighten the policy stance, but to keep it broadly unchanged," Mr Draghi said.
While Mr Draghi made it clear the current stimulus needed to remain in place as inflation remained "muted", it was enough for the market to interpret the comments as a more hawkish stance from the ECB.
That prompted a yields in both German and Italian bonds to bounce, while the euro rose against most currencies, including the Australian dollar.
At 1:30pm (AEST) an Australian dollar was worth 67 euro cents and 76.06 US cents.
Topics: economic-trends, stockmarket, money-and-monetary-policy, business-economics-and-finance, united-states, european-union
First posted