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Will Raising Rates Burst a Stock Bubble?

John Blank


Want my 800-pound macroeconomics “Elephant In The Room” these days? 

It’s the underpinning to the booming stock market. The last few years, investors know stock prices have been elevated by ultra-aggressive low interest rate policy.  Investors don’t know what happens to stock prices when U.S. rates rise. 

U.S. rates ARE going to rise next year.

Here are two possibilities:

(1) Asset prices are not “artificially high”.  As long as the Fed is able to set rates at low levels, they appear to be needed by the real sector of the U.S. economy.

(2) Asset prices could turn out to be artificially high.  Shouldn’t the Fed’s ultra low rates be judged against higher rates out in the entire global economy? If so, they could be too low. Raising them would prick the asset bubbles.

Asset price bubbles might only become clear when the Fed is forced to adjust rates upwards towards a broadly defined “natural” rate.

My RTI question:  Will Raising Rates Burst a Stock Bubble?


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