Former nominee for Fed regulation chief frets about rising market risks

4:01 pm Thursday, October 20th, 2022

By Michael S. Derby

NEW YORK (Reuters) – As the Federal Reserve pushes forward with aggressive rate rises to bring down surging inflation it may unintentionally break something in the financial sector, a risk it may not be thinking enough about, a former top government policymaker said.

Citing the recent heavy market turbulence that struck the United Kingdom, Sarah Bloom Raskin told a University of Pennsylvania conference Thursday that those overseas events were “a warning of sorts” for the United States.

Raskin is currently a law professor at Duke University. She had been named to be the Fed’s point person on financial regulation last year before withdrawing. Raskin was also a Treasury official in the Obama Administration and before that, she served as Fed governor from 2010 to 2014.

Raskin did not say where trouble would come from if it arrives, only that the current situation, with Fed action, disrupted economies and risks from Russia’s war on Ukraine, is ripe to generate some ugly confluence of events. She said she was not sure Fed officials were paying close enough attention to the issue given their laser-like focus on taking action to lower inflation from 40-year highs.

“Things are fragile” due to so many developments, Raskin said. “When you have a lot in motion, stuff happens, like stuff can break,” she said, adding “you see your vulnerabilities any time when interest rates start to increase.”

With the Fed motivated by its monetary policy goals, “financial stability is, my guess, not fully integrated into decision making.”

Raskin weighed in as many market participants fear the Fed’s rate rises, which will almost certainly run into next year and will lift the Fed’s short-term target rate to levels not seen in decades, will cause some sort of major stress in the financial sector. Also in play is the Fed’s move to shrink the size of its balance sheet, which means that the central bank is withdrawing support from critical bond markets that serve as benchmarks for global lending.

Asset values have been hard hit by the Fed’s actions and there are broad worries about liquidity in markets for securities like U.S. Treasury bonds. But central bankers don’t seem to be worried, acknowledging the stress but saying there’s no signs of disorder that might cause them to rethink what they are doing on the monetary policy front.

Fed Governor Christopher Waller noted earlier this month that he was “a little confused” by investor angst, noting “while there has been some increased volatility and liquidity strains in financial markets lately, overall, I believe markets are operating effectively.”

(Reporting by Michael S. Derby; Editing by Andrea Ricci)