Asset Bubbles on the Fed’s Radar

June 4, 2021

Asset Bubbles on the Fed’s Radar Photo

The Federal Reserve’s (Fed) announcement Wednesday that it will soon begin selling its $14.2 billion corporate bond portfolio was surprising in light of recent Fed communication. During his April Federal Open Market Committee (FOMC) press conference, Fed Chair Jerome Powell emphasized the need to see “substantial further progress” on its dual-mandate goals before even discussing balance sheet reduction. While Fed officials claimed the sales are unrelated to monetary policy, corporate purchases were a critical part of its expanded monetary policy tool kit to maintain the flow of credit and financial stability during the height of the coronavirus crisis.

Timing of the announcement Wednesday, a day when so-called “meme” stocks were once again surging in frenzied trading activity, may not have been a coincidence. Chair Powell has been willing to tolerate “things in the capital markets that are a bit frothy,” but trading activity in many of the “meme” names has moved beyond that level. The Fed’s balancing act to begin tapering bond purchases without creating excessive financial market volatility will be even more challenging if bubble-like market behavior continues to build.

Tags: Federal Reserve | FOMC | Corporate bonds | Monetary policy | Meme stocks | Market volatility

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