Richmond Fed’s Lacker foresees rising risk levels in global markets
Ever since Bernanke's verbal faux pas earlier this month, global markets have not been sure what to think about the future of Federal Reserve intervention in the international financial system. Investors remain skittish about where asset prices will go, how their portfolios will perform and, most troubling, why risk levels are skyrocketing so quickly.
Following the post-FOMC press conference, several senior Fed officials have sought to clarify the chairman's words. While some argue that Bernanke was speaking hypothetically about a near-term "taper," others, including Richmond Fed chief Jeff Lacker, are suggesting that the trouble is far from over as the American central bank stumbles toward a future that will eventually see the end of quantitative easing.
In a rather direct speech given recently, Lacker argued that market participants have been benefiting from the fact that "we're continuing to spike the punch," in his own words.
"Bond and stock markets fell sharply in response, but that should not be too surprising," Lacker commented. "The Chairman's statement forced financial market participants to re-evaluate the likely total amount of securities the Fed would buy under this open-ended purchase plan – in other words, how much liquor would ultimately be poured into the punch bowl."
He went on to describe the fundamentally healthier aspects in the U.S. economy, including better-than-average manufacturing statistics. However, he stressed that more pain could come if the Fed decides that "tapering" is in the best interest of the finance system.
"As market participants gain additional insight from the words of Federal Reserve officials or by policy actions in coming quarters, further asset price volatility seems likely," he stated.
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