Tags: Fed | bubbles | economy | stock

WSJ: Fed Officials on Lookout for Bubbles

Thursday, 09 Jan 2014 12:21 PM

By Dan Weil

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Minutes of the Federal Reserve's December meeting show that Fed officials are watching for bubbles in the financial system, though they see little indication of any now.

"The Fed is looking for evidence that they may be creating asset bubbles," Dan Greenhaus, chief global strategist at brokerage firm BTIG, told The Wall Street Journal.
"That's better than not looking."

In particular, Fed officials are examining the stock market. The trailing price-earnings ratio for the Dow Jones Industrial Average has increased to 17.0 from 14.8 a year ago, according to The Journal.

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"Several [Fed officials] commented on the rise in forward price-earnings ratios for some small-cap stocks, the increased level of equity repurchases or the rise in margin credit," the minutes stated.

San Francisco Fed President John Williams told The Journal he's watching out for bubbles. But, "right now the situation is not one where we are seeing broad indicators of a lot of excesses in financial markets that pose a lot of dangers to the financial system or the economy."

The latest statistics "give me more confidence that the underlying improvement in the momentum of the economy is real," Williams said.

GDP grew 4.1 percent in the third quarter.

One expert who isn't worried about a bubble in stocks is Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School.

The Dow's fair market value stands at 18,000, a 9.8 percent increase from Thursday morning's level of 16,387, he told CNBC. Strong profit and economic growth will push the market higher, Siegel explained.

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