(Bloomberg) -- Federal Reserve officials played down recent turmoil in global stock markets, sounding as resolved to push ahead with gradual increases in interest rates as before the rout.
“Having a bump like this has virtually no consequence in my view of the economic outlook,” New York Fed President William Dudley said Wednesday at an event in New York. “My outlook hasn’t changed because the stock market is a little bit lower than a few days ago. It’s still up sharply from where it was a year ago.”
“That said, if the stock market were to go down precipitously and stay down, then that would actually feed into the economic outlook and that would affect my view in terms what’s the implications for monetary policy,” he said.
The S&P 500 plunged 4.1 percent Monday, making for almost an 8 percent drop over six trading sessions since Jan. 26 and triggering a wider sell-off in Asia and Europe. The U.S. market bounced back 1.7 percent Tuesday but remained volatile.
“Generally, market functioning seems to be pretty good,” Dudley said. “There was a period on Friday where there was a very sharp movement downward around 3 o’clock in the equity market. That’s something we have to look at and evaluate what really caused that. But I think generally liquidity is pretty good.”
Financial Products
Dudley also raised questions about whether some financial products tied to market volatility were well put together.
“Some of these VIX products, I think, people now are going to look at this with the benefit of hindsight and say, ‘Were these really well designed?’,” he said. “This wasn’t that big a bump in the equity market and these products actually blew up.”
The VIX index uses derivatives to track expected volatility in U.S. stocks. After months of calm, it spiked in recent days, causing substantial losses for investors who had been making returns betting against its rise.
Stretched Valuations
Dudley’s views were largely shared by his fellow central bankers who were not surprised by the swoon because they’ve considered stock valuations stretched for a while. The steep price decline also shows scant signs so far of posing much of a risk to the stability of the financial system or the durability of the economic expansion.
“Corrections are healthy” after extended rallies, Dallas Fed President Robert Kaplan said Wednesday in Frankfurt. “What I look at is whether it has implications for financial conditions or the health of the underlying economy and I would say, I don’t think so.”
After Tuesday’s close, the S&P 500 remained about 9 percent higher compared with its level in late July, when Fed staffers first deemed asset prices to be elevated.
Speaking Tuesday in Lexington, Kentucky, St. Louis Fed President James Bullard called the downturn “the most predicted selloff of all time.”
While the central bank is sometimes seen as stepping in to protect investors from steep market declines with a “Greenspan put’’ or a “Bernanke put’’ named after former chairs, Bullard said the Fed isn’t focused on helping markets so much as reacting to the same data.
“To the extent the markets see something that is different from what the Fed sees, it is important information,” he said. “It is not so clear to me here that there is a story like that -- that the U.S. economy is not as robust as we thought it was.”
Dudley was even more dismissive.
“So far this is a big story in the press,” the New York Fed chief said at an event sponsored by Thomson Reuters Corp. and the European American Chamber of Commerce. “It’s a big story for financial market participants. But I don’t think it’s a big story at all for central bankers.”
