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IMF chief economist says ‘maybe’ financial markets are in midst of irrational exuberance

October 10, 2017 7:32 PM
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IMF chief economist says ‘maybe’ financial markets are in midst of irrational exuberance

Obstfeld: There is risk of ‘adjustments in a downward direction’

The reporter put his question succinctly to Maurice Obstfeld, the chief economist at the International Monetary Fund, at his news conference Tuesday: Are financial markets being irrationally exuberant?”

The phrase “irrational exuberance” became famous after former Federal Reserve Chairman Alan Greenspan used it in a speech during the dot-com bubble in 1996. It is now used as shorthand for speculative bubbles.

The IMF chief economist started with the caveat that government officials often use when discussing financial markets—that it is always to difficult to determine what is a fair asset price.

But he quickly pivoted away from any sort of canned answer by saying that, in light of a number of indicators of asset valuations at historic highs, “you have to wonder.”

“To some degree, asset prices are being supported by very, very low interest rates. They are supported by growth expectations that could be disappointed. Our assessment that longer-term growth rates, particularly in advanced economies, are subdued, feeds into that,” Obstfeld said.

“So, our concern is simply that, if interest rates were to rise faster than expected or growth outcomes not validate these high asset prices, there could be abrupt repricing that could be disruptive.”

“A firm judgment on assets being overpriced—I don’t think we’re ready to make. But I think we are ready to recognize that may be the case and there could be adjustments in a downward direction,” he said.

The IMF released its latest report card on the global economy on Tuesday, saying that the global economy pickup is likely to be sustained this year and but warned the recovery was “incomplete” and there were substantial risks besides a sharp jump in interest rates.


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