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In stock-trading frenzy, no systemic risk, Kaplan says

Dallas Federal Reserve Bank President Robert Kaplan said Tuesday that while the Fed’s massive bond-buying program is creating plenty of liquidity in financial markets, there are no signs of broad market instability at present.

“I don’t see anything right now systemic,” Kaplan said in a CNBC interview, responding to a question about a possible link between the Reddit-fueled frenzy in GameStop Corp shares and monetary policy. Kaplan did not comment on GameStop directly, and instead addressed the broader question of how Fed policy affects financial markets.

“Some of the current situation you are seeing – one of the factors – is there is a lot of liquidity, and some of that relates to Fed purchases of $80 billion of Treasuries and $40 billion of mortgage-backed securities every month: I think it’s wise for us to acknowledge that.”

The Fed has kept interest rates near zero since last March and has pledged to keep them there until the economy has returned to full employment and inflation has reached, and is on track to overshoot, the Fed’s 2% goal.

It has also said it will keep buying at least $120 billion of bonds each month until there is “substantial further progress” toward the Fed’s full employment and 2% inflation goals, a benchmark that Fed Vice Chair Richard Clarida has said may not be reached until next year.

The bond-buying and low interest rates are aimed at making borrowing cheap and boosting investment and hiring to blunt the economic fallout of the pandemic. Critics say it can distort markets and create dangerous asset bubbles.

Fed Chair Jerome Powell has said it is “premature” to consider reducing the Fed’s bond-buying program, given the millions of Americans still out of work.

Kaplan said Tuesday he supports the Fed’s current “aggressive” policy.

“I still think we need to be doing what we are doing right now, in the teeth of the pandemic, but again, I think if we go beyond it, it will be healthier to start limiting this liquidity and normalizing policy down the road,” Kaplan said.
Source: Reuters (Reporting by Ann SaphirEditing by Paul Simao and Dan Burns)

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