Saturday, August 16, 2014

Fears of Renewed Instability as Fed Ends Stimulus

Common Sense

By JAMES B. STEWART, NYT
AUG. 15, 2014

After a nearly uninterrupted five-year rally in stocks and bonds, some investors seem to be getting nervous. On July 31, the Dow Jones industrial average dropped 317 points, wiping out the year’s gains. Last week, junk bond funds experienced record withdrawals and junk bond interest rates spiked.

Such gyrations may be healthy, a reminder that there are risks and that markets go down as well as up. But they could also be the harbinger of something more worrisome, which would be renewed financial instability as the Federal Reserve brings to an end its extraordinary easy money policy. The Federal Reserve has said it expects to raise interest rates in 2015 for the first time since the financial crisis.

While at the Fed, Mr. Stein was viewed as the chief advocate for financial stability on the seven-member board, where he pondered the possible unintended consequences of the Fed’s stimulus policies.

(More here.)

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