Explanations other than asset price bubbles may be behind the rallies in several asset markets, according to the Federal Reserve Bank of Richmond.
“There are some economic factors that may initially appear to have fueled these rallies. Most notably, monetary policy is accommodative in the United States due to both very low interest rates and quantitative easing,” the Fed said. “This means many developing nations also have pursued easy monetary policies since they officially or unofficially fix their currency to the dollar. Other developed countries, too, currently have easy monetary policies.”
Analysts suggest a weak dollar and accommodative monetary policy “has heightened 'carry trade’ activity and as a result has contributed to these asset market rallies — and a new bubble.”
“However, factors other than an emerging bubble — for example, improving macroeconomic conditions in line with economic recovery — might explain these asset market rallies,” the Richmond Fed said. “Empirically, it is not unusual to observe asset price rallies after a crisis.”
While economists agree there has been an increase in carry trade transactions, they differ on whether this is necessarily creating a bubble.
The Fed looked at emerging market equities and commodities.
“The recovery in growth rates of emerging markets may warrant higher stock prices,” it said, while recovery “could have boosted the demand for commodities, and thus their price.”
