Stein Sees Signs of Excessive Risk Taking in Some Markets – Bloomberg 02-07-13

Salient to Investors:

Federal Reserve Governor Jeremy Stein says:

  • Significant reaching-for-yield behavior in corporate credits are early signs of potentially excessive risk-taking, while not posing a threat to financial stability.
  • A decline in the quality of debt through greater subordination or less use of protective covenants also signal reaching for yield.
  • It is not clear low interest rates caused the house-price bubble from 2002 to 2006.
  • Monetary policy has the important advantage over supervision and regulation in that it gets in all of the cracks.

Kansas City Fed President Esther George is concerned that record-low interest rates are overheating markets for assets from bonds to farmland to junk bonds but the Fed should not take any actions yet.

Prices “of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels” and may signal market imbalances, George said in a speech Jan. 10.

Viral Acharya at NYU said supervision by itself is not enough so use of interest rate policy is pervasive and can reach across markets where the Fed has no regulatory authority.

Douglas Elliott at Brookings said it is well documented that holding rates low for long periods increases the search for yield.

Read the full article at http://www.bloomberg.com/news/2013-02-07/stein-says-fed-should-consider-using-rates-to-further-stability.html

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