Fed's Bullard: stock drop prevented asset bubble

Feb 25, 2016, 2:13 PM EST
St. Louis Federal Reserve President James Bullard.
Source: CNBC/flickr

 St. Louis Federal Reserve President James Bullard said the stock market's correction had a silver lining, preventing an asset bubble.

CNBC writes:

Despite investor concern about the 2016 market downtown after years of strong returns, Bullard told CNBC's "Squawk Box" that U.S. equities seem to be better priced at current levels. "If we had continued to go up at that same pace, that would have been an asset pricing bubble," he said. "You're [now] closer to fair value." Bullard attributed this year's market turmoil to traders factoring in all at once projections for four interest rate hikes in 2016. It was as if the December hike was 125 basis points instead of the actual 25 basis points, he said, citing concern about the Fed's 17-straight hikes in the 2004 to 2006 tightening cycle. "Markets got the idea that once the Fed gets going, there's no stopping it. It's like a train leaving the station," he said. "I do worry about this, that we've somehow signaled that we're on a freight train path even though we're not intending to do that."

Newsmax writes:

"What we have done is ensconce the biggest banks as if they are going to be around 50 or 100 years from now," Bullard said, a fact that may discourage innovation and leave regulations out of step with changes in the financial industry. Federal agencies have designated a group of large banks as systemically important and subject to stricter oversight and capital rules, and forced them to prepare "living wills" to prepare for possible failure without need of a taxpayer bailout. But many have argued those firms still remain too big to fail, and would draw government support if they falter. Bullard said he agreed the problem has not been resolved, and endorsed Minneapolis Fed President Neel Kashkari's decision to launch research on what Kashkari referred to as "transformational" ideas about how to deal with the largest financial firms. After helping craft plans as a Treasury Department official to save the big banks during the financial crisis, Kashkari now thinks they should be broken up.

Separately, Reuters notes:

The U.S. economy is on track to grow 2.5 percent in the first quarter after government data suggested a decline in real consumer spending growth in January, the Atlanta Federal Reserve's GDPNow forecast model showed on Thursday. That pace is a tad slower than the regional Fed's prior estimate of 2.6 percent growth on Feb. 17, the Atlanta Fed said on its website. First-quarter real consumer spending growth declined to 3.1 percent from an earlier estimate of 3.3 percent following data on January consumer prices released last Friday, the Atlanta Fed said.