The old adage that you don’t want the cure to be worse than the disease is worrying the heck out of global policy makers at the moment as they contemplate a world where the Fed is tapering and rates are normalising.
As we saw in June, even talk of removal of Fed buying saw the market swoon and now that taper seems to be off the table, stocks around the world are making multiyear and all-time highs.
So it is no surprise that the IMF is worried that the Central Bank stimulus is at risk of blowing more bubbles.
IMF financial stability expert and former US Federal Reserve economist Bill Lee told the AFR:
One of the things we are concerned about is if you put all of this extra liquidity out into the economy and distort financial markets by pushing people into risky assets – namely equities – what will that do to financial stability? It will increase the risks
Today’s chart shows the growth in the US federal reserve balance sheet and the difficulty that the Fed and other central banks are going to have in withdrawing the stimulus without causing the next crash in stocks.
It is a difficult problem to solve – the Fed’s balance sheet saved the US and global economy from the last crisis. But will it cause the next one.
You can read more of the AFR story here