Fed Saw Investors As Too Complacent On Risk As Exit Plan Evolves

Some Federal Reserve policy makers were concerned investors may be getting too complacent and indicated they’re on the lookout for excessive risk-taking, minutes of their June meeting show.

Officials also moved closer to deciding on the main tool they will use to tighten monetary policy when the time comes, most likely next year, and agreed they’ll end their asset- purchase program in October if the economy holds up.

Fed officials expressed concern about low volatility in equity, currency and fixed-income markets, with some saying investors aren’t factoring enough uncertainty into the outlook for the economy and monetary policy. At the same time, the officials said the central bank should continue to support favorable financial conditions needed to sustain growth, according to the minutes.

Five years into an expansion, officials are preparing plans to wind down the most aggressive stimulus in the central bank’s history without roiling markets. The improving U.S. economy and Fed pledges to do what it takes to preserve the momentum have almost tripled U.S. stock prices since 2009 and pushed swings across asset prices to new lows.

“The Fed is still the investor’s friend, not something to be feared,” said Brian Jacobsen, who helps oversee $231 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “Where there are bubbles, the Fed will use its role as a regulator and supervisor to address those problems. It will not use monetary policy.”

St. Louis Fed President James Bullard, in an interview yesterday, said “financial stability has to be a top concern of the committee following the financial crisis.”

‘Bubble Process’

Even so, he said, he has seen nothing “to date that is so severe that I would bring it in as a top concern for monetary policy.” The greater concern is interest rates “that are possibly too low the next couple of years,” and that could “get into feeding into some kind of bubble process.”

U.S. stocks extended gains after release of the minutes, climbing back toward a July 3 record after falling for two days. The Standard & Poor’s 500 Index added 0.5 percent to close at 1,972.83 in New York. The yield on the 10-year Treasury note fell one basis point, or 0.01 percentage point, to 2.55 percent.

Most Federal Open Market Committee participants agreed that the interest rate on excess reserves banks keep on deposit at the Fed “should play a central role” in the exit from extraordinary monetary stimulus, according to minutes of the June 17-18 meeting released yesterday in Washington.

More Depth

“This is the first set of minutes that have really gone into more depth about the specific tools that they’ll use when it comes to normalization,” said Kim Chase, a Houston-based senior economist for Spain’s Banco Bilbao Vizcaya Argentaria SA. “Slowly but surely they’re starting to give away a few more details. It’s positive from the market standpoint that they’re discussing it more and maybe are on a clearer path.”