The San Francisco Fed president, like all of his colleagues, thinks the markets didn’t quite grasp what Ben Bernanke was saying a couple of weeks ago when they started selling everything in anticipation of an immediate (if imagined) beginning of the end to the central bank’s bond-buying program. But miscommunication can have salutary effects.
John Williams, president of the San Francisco Federal Reserve Bank, said some of the violent selloff in stocks and bonds has an upside: It may have wrung unwelcome excesses and unhealthy trading activity from the market.
Mr. Williams, who spoke to reporters Friday, is fully on board with the message of his fellow central bankers. People are wrong if they think the message of the Federal Open Market Committee is that a tighter monetary policy now looms closer, he said.
That said, the market reaction to the Fed meeting shows “clearly there was more going on” in the trading world than many had understood, he added. The huge selloff in the 10-year Treasury note is “probably a sign there was complacency and excess going on, and maybe that’s a good thing that it came to an end,” Mr. Williams said….
”It could be the case, maybe, that what we are seeing now is that after zero percent interest rates being there for a long time, there is just an accumulation of complacency,” as well as a move to adopt trading strategies divorced from economic fundamentals, Mr. Williams said….
The selloff suggests “there was a building amount of froth in certain segments of the market, leveraged loans, or junk bonds or in Treasury markets and things,” he said. To the extent that’s now gone, it’s a good thing for markets and the broader economy, Mr. Williams added.
SF Fed’s Williams: Selloff Cleanses Financial Markets Of Unwelcome Excesses [WSJ Real Time Economics blog]