Part of the reason that hasn’t led to worse consequences — layoffs in the tech industry being one notable exception — is precisely because those assets were starting from such a high point, said Alp Simsek, a professor at Yale School of Management.
“We’re going back to normal levels,” he said.
He argued that asset prices were fueled by more than just a speculative frenzy tied to a surge in cash in the economy. Because the Fed had slashed interest rates and bought large quantities of U.S. government debt and mortgage-backed securities during the pandemic, the value of many assets naturally increased.
“When we were in a recession, the economy needed high asset prices to recover faster, but once you recover, you want to take away that boom,” he said. “In theory, this works. In practice, when you bring asset prices up and down very quickly, there is a risk of something breaking down.”
Schwab’s Gordon said American consumers have also been shielded by the strength of the labor market. When people are employed, they’re less likely to be forced to sell their homes or other assets to make ends meet. Still, he noted that consumer savings have begun to dwindle.
“At the same time, credit card debt has surged,” he added. “All of that, to me, suggests that there’s a lot more stress under the surface.”
Meanwhile, the more the job market remains resilient, the higher the central bank may have to raise interest rates, particularly given recent data suggesting wage growth is accelerating even amid signs that inflation is cooling.
“There is a risk of complacency given the unexpectedly positive credit performance over the course of the pandemic,” Acting Comptroller of the Currency Michael Hsu, who oversees national banks, told reporters Thursday. “We need to remain vigilant.”
There is always a danger that firms in less-regulated corners of the financial system have made risky investment moves that blow up and feed out to more central players, destabilizing the economy. But there are few hints so far that such an event is in the offing, even as those precise dynamics play out within the world of crypto assets.
“Given how quickly and how dramatically circumstances have changed, things could be going much, much worse than they are,” said Kathryn Judge, a professor at Columbia Law School. “But I am not going to rest easy until we’ve had more time for the dramatic shift we’ve seen in the interest rate environment to really work its way through.”