The Federal Reserve may finally control interest rate markets, but it's likely watching sparkling stocks that look unconcerned.
At the start of two days of congressional testimony this week, Fed chair Jerome Powell is convinced that rate futures and Treasuries have finally heeded the Fed's December message on moderate interest rate drops later this year.
However, even a brief glance at the AI-seeded spike in Wall St stock indexes to new records and the near-frenzy in chipmakers and pretty much any stock tied to the AI boom will make him recall Alan Greenspan's words, opens new tab
In December 1996, Greenspan discussed "irrational exuberance" in stock markets and what the central bank might do about it in a comprehensive speech on Fed history and mandates.
His modest response was that the Fed did not care about bubble-like stock prices unless their mispricing affected the economy or threatened financial stability. The now-famous statement hammered home, upending what seemed like frothy global market values for many days on the expectation that the Fed, which had held policy stable all year, may increase to burst the equity bubble.
"We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability," Greenspan remarked, referring to the 1987 market crash's limited impact.
"But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy," he said. "Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy."
Many believe that if he had stuck to that last remark, we could have avoided the even larger banking and mortgage-backed debt bubble he presided over in the next decade, which exploded with severe global implications long after the Fed chief left office. Powell may learn from Greenspan's moderate rate rise in March 1997, 18 months on hold, and 1998 cut, despite acknowledging the risks.
Follow for more updates