Turbulence on Wall Street will likely return when the Federal Reserve decides to hike interest rates, top U.S. economists said in a paper that warned the Fed's huge stimulus program could have harmful consequences.
The paper, released on Friday, focused on a financial market selloff in mid-2013 after Fed officials said they planned to trim monthly bond-buying.
The authors found mutual fund investors participated heavily in the selloff even though their market bets weren't made with a lot of borrowed money.
This is important because policymakers sometimes weigh the chances of a financial crash by looking at the size of leveraged bets, which can be prone to swift reversals. The research highlights a perhaps under-appreciated risk for the Fed's plans to wind down its easy-money stimulus.
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| Minneapolis Fed President Narayana Kocherlakota. |
"Whenever the decision to tighten policy is made, then the instability seen in summer of 2013 is likely to reappear," wrote JPMorgan chief U.S. economist Michael Feroli, University of Chicago professor Anil Kashyap and two other well-respected economists.
Several Fed officials were present at the high-profile economics conference where the paper was presented, and two said the paper raised real concerns.
That said, the ideas highlighted by the paper already play into the Fed's current monitoring of financial risks, said Minneapolis Fed President Narayana Kocherlakota.
Kocherlakota, who is a voting member on the Fed's rate-setting policy committee this year, has argued forcefully for monetary stimulus and said the U.S. economy remains so weak that the Fed still has another "two to three years" to mull financial stability risks.
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