Putting Financial Stability Concerns Into Perspective

by: David Beckworth

Amidst the siren calls of financial stability concerns, it is worth remembering that not all indicators show asset price froth and excesses. In fact, some show the opposite. Here are a four:

(1) The risk premium as measured by the BAA corporate yield minus 10-year treasury yield is still elevated.

(2) Compared to recent years, households are still holding a relatively high share of liquid assets in their portfolios.

(3) Broad measures of money assets that include both retail and institutional assets have only recently passed pre-crisis peaks and are far below trend.

(4) The 10-year real risk-free treasury interest rate remains negative and closely tied to the output gap. This measure does not reflect the Fed's lowering of the term premium through QE, but of the expected path of the real economy. If the economy were frothy, we would expect it to be positive.