According to the Wall Street Journal, with experts knowledgeable about financial bubbles, the situation on Wall Street is very worrying. Stock prices are rising to their highest levels since the dot.com bubble in 2000. US home prices return to their pre-Covid-19 highs. Companies borrow money with the lowest interest rates in history. Individual investors are pouring money into cryptocurrencies like Bitcoin and Ether.
Analysts confirmed the decisions of the Fed about the monetary policy leading to the current situation. Easy monetary policy often drives the financial boom, and American monetary policy has never been as easy as it is today. Fed maintained interest rates close to 0% throughout last year and said it will not change interest rates for at least the next two years.
Fed buys hundreds of billions of dollars of bonds. As a result, the yield on 10-year US Treasury bonds is much lower than the inflation rate (the second time in 40 years).
Monetary policy about interest rate
The Fed acted to assist the US economy to cope with the effects of the Covid-19 pandemic. Thanks to the Fed’s efforts and the US Congress’s approval of the stimulus packages worth $ 5,000 billion, the US economy is recovering gradually. If the US economy is healthy again, there is no reason for the Fed to continue its easy monetary policy. That will threaten stocks and cryptocurrencies.
“Equity markets at a minimum are priced to perfection on the assumption rates will be low for a long time,” WSJ quoted economist Jeremy Stein of Harvard University. He predicted that stock prices will be strongly adjusted if the Fed decides to tighten monetary policy to fight inflation and the bond yields will rise to 1.5%.
Earlier this week, Fed warned that “asset valuations are too high” and risk plunging if investors limit risks, anti-epidemic efforts disappoint or the economic recovery process slows down. Fed Chairman Jerome Powell shows no signs that the organization will limit stimulus anytime soon.
Last year, the Covid-19 epidemic affected the US economy more heavily than the 2008 financial crisis. However, after two months, the US economic activities began to recover. Fed announced new lending programs and the US Congress approved the stimulus package of 2.200 billion USD. The vaccine was introduced earlier than expected.
Economists forecast that the US economy could return to pre-translation levels in the second quarter of this year. Despite these forecasts, the US monetary policy continues to be easy. In May 2020, the Democratic Party proposed an additional stimulus package of $ 3,000 billion when it was forecasted that the total economic output dropped by 6% last year.
The decline was, in fact, less than 3%, but Democrats – after gaining control of the White House and Congress – still decided to launch this stimulus package.
Fed started to buy bonds in March 2020 to stabilize the market. Last summer, when the markets were stable, the Fed expanded its bond-buying program. The agency also set a target to push inflation above 2%. Therefore, Fed commits not to raise interest rates until the US job market recovers and inflation reach 2%.
When will the fever stop?
Massive pumping of money into a recovering economy is the reason Wall Street experts are more optimistic than ever on stock prices. The S&P 500 and Dow both rose to record highs, at 4,232.6 and 34,777.76, respectively.
The prices of cryptocurrencies have also exploded. CoinDesk said that on May 29, the cryptocurrency market reached a size of more than $ 2,000 billion, equivalent to all the USD in circulation. Bitcoin price increased 95% from the beginning of the year, Ether price increased by more than 300%.
According to the WSJ, it is difficult to predict when the stock and crypto craze will stop. However, the speculative bubble will shatter if companies fail to reach a comparable return to their stock prices and new rivals of Bitcoin or Ether emerge.
Bitcoin used to dominate the crypto market but is facing stiff competition from Ether and other currencies. However, experts say that for the price of stocks and cryptocurrencies to plunge, a major incident must happen, such as a recession, financial crisis, or inflation.
Last week, FED confirmed that SARS-CoV-2 was still the biggest threat to the US economy and the financial system. However, the US is gradually controlling the epidemic and the risk of a recession is not great. The possibility of a financial crisis is possible, but the banks are having a large amount of capital.
If investors borrow too much to buy stocks or cryptocurrencies, a plunge in asset prices will lead to a crisis. But that is unlikely to happen.
The other risk is inflation. Investors are concerned about the risk of inflation as many industries lack semiconductors, timber, and many raw materials. However, US inflation may only increase slightly. However, experts warn that a subjective monetary policy can lead to serious consequences for the US economy.