Fed Watch: Froth Alert

One more from Tim Duy:

Froth Alert, by Tim Duy: Former Federal Reserve Vice-Chair Donald Kohn - suspected of being a contender for the top job at his old employer - warned about too loose monetary policy today. From the Wall Street Journal:

“Very easy monetary policy often builds imbalances that may become so large that can’t be countered by regulation,” Mr. Kohn said at an event on financial stability at the Brookings Institution think tank.

It would not be surprising that long-term Federal Reserve employees might now be a bit more cautious about the link between monetary policy and financial imbalances given the two recent asset bubbles. And they may even be asking themselves if another is brewing:

Net worth as a percentage of nominal GDP is approaching the highs of the internet bubble era. And that was at the end of the first quarter; US equities have made further gains since then. Now, I don't claim that I can identify the "right" level of net worth to GDP, and I doubt monetary policy makers would claim they could either. That's what make asset bubbles tricky to identify in the first place. But it is true that in the recent past, net worth near these relative levels has been followed by a certain amount of, well, let's just say "unpleasantness." I admit that we are heading into territory that makes me think more about financial imbalances, and it is tough to believe that Fed officials are not thinking the same thing.

That said, is there an immediate risk? In recent history, the "unpleasantness" did not begin in earnest until the Fed inverted the yield curve, and I suspect that Federal Reserve Chairman Ben Bernanke will tell us later this week that they don't expect to even begin raising interest rates until mid-2015. So even if this another asset bubble is brewing, arguably is has a long way to run.