US Fed warns about declines in asset prices

The U.S. Federal Reserve published a report on Thursday that asset prices may be vulnerable to significant declines should risk appetite fall. Chairman of the U.S. Securities and Exchange Commission Gary Gensler announced regulations on individual investors’ ultrashort-term investment. Following the comment made by Secretary of the Treasury Janet Yellen that the interest rates may have to rise somewhat to keep the economy from overheating, the high-ranking officials of the U.S. economy are warning the asset and real inflation for three days in a row.

The report of the Fed is straightforward. “High asset prices in part reflect the continued low level of Treasury yields. However, valuations for some assets are elevated relative to historical norms even when using measures that account for Treasury yields.” Gensler’s criticism of the game-like features of free stock trading app Robinhood, which has driven the expansion of individual investment, clearly reveals his intention to slow down the overheated stock market.

　

A series of movements indicates that the U.S. financial authorities have begun reducing the overheating of the market before taking full actions that impact the global economy. This is in line with the market expectations that the reduction of quantitative easing and the rise in the interest rates, which were initially forecasted to take place at the end of next year, will be advanced to sometime this year thanks to the quick COVID-19 vaccination and economic recovery in the U.S. The U.S. is showing clear signs of recovery with consumer price inflation rate exceeding three percent in April and the prediction for over seven percent growth rate this year, which would be for the first time since 1984.

　

With changes in the U.S. economy, central banks of other countries will consider raising interest rates to prevent capital outflow. In South Korea, however, young people in their 20s and 30s are relying on low-interest rates to expand their investment in stock and cryptocurrency, creating a bigger asset bubble. The panic buying of housing among young people is continuing with 37 percent of apartment or studio purchases in Seoul made by those in their 20s and 30s in the first quarter this year.

Once the low-interest period is over, household debt, which has exceeded a dangerous level and gone up close to South Korea’s GDP, will threaten people’s lives. The government recently announced measures for household debt considering the situation, but the restructuring of so-called “zombie companies,” which are on the rise due to the prolonged COVID-19 infections, hasn’t even started yet. Individuals, businesses, and the government should reflect on their status in preparation for the burst of the bubble.