Stein Is Mum on Credit Bubbles

Fed Governor Jeremy Stein took office on May 30, 2012. So he is relatively new to the Fed. He made his mark this year on February 7 with a speech titled, “Overheating in Credit Markets: Origins, Measurement, and Policy Responses.” In it, he examined various excesses in the credit markets resulting from the Fed’s ultra-easy monetary policy. He warned that the Fed needs to monitor such “episodes of credit market overheating that pose a potential threat to financial stability.”

Stein followed up this speech with two other speeches, on “Regulating Large Financial Institutions” (April 17) and “Liquidity Regulation and Central Banking” (April 19). Today, he was the latest talking Fed head to talk about the FOMC’s latest meeting in a speech titled, "Comments on Monetary Policy.”

A few Fed watchers have speculated that the FOMC’s decision to “deputize” Fed Chairman Ben Bernanke to announce that QE would most likely be phased out by mid-2014 might have been aimed at taking the air out of some of the credit bubbles identified by Stein back in February. Remarkably, he didn’t even hint at this possibility in his latest comments!

Instead, he concluded, “We have attempted in recent weeks to provide more clarity about the nature of our policy reaction function, but I view the fundamentals of our underlying policy stance as broadly unchanged.” Instead of taking credit for convincing his colleagues to take some of the air out of credit bubbles, he said that the recent jump in bond yields was an overreaction to the FOMC latest communications! He added:

I don't in any way mean to say that the large market movements that we have seen in the past couple of weeks are inconsequential or can be dismissed as mere noise. To the contrary, they potentially have much to teach us about the dynamics of financial markets and how these dynamics are influenced by changes in our communications strategy.

In other words, Stein enthusiastically joined the FOMC’s damage-control brigade. He suggested that QE most likely would be tapered at the September meeting, even in the event of an unfavorable data release. If that bad news is confirmed by more bad news in October and December, then “this would suggest that the 7 percent unemployment goal is likely to be further away, and the remainder of the program would be extended accordingly.” Is that clear?