Experts assess the risks of a bubble in the market

Morgan Stanley experts believe that the loose monetary policy of the US Federal Reserve and the acceleration of inflation have led investors to face negative real interest rates, which are fuel for asset bubbles. Lisa Shalett, IT director of the company noted: «We are concerned that the Fed's policy is not in line with the fundamentals.»

Last week, Fed Chairman Jerome Powell said that the regulator intends to adhere to a wait-and-see policy regarding the timing of an increase in the base interest rate. Recall that the Fed will reduce monthly purchases of US Treasury bonds by $10 billion per month and by $5 billion for mortgage-backed securities, so the rate will remain unchanged until at least June 2022.

However, Morgan Stanley is confident that «it's time to sound the alarm», since the gap between the federal funds rate and the consumer price index (CPI), which measures inflation, is the largest in 60 years.

Shalett also notes that the risks of a market bubble are growing, and labor market data, estimates of future earnings for 2022 and fear/positioning indicators are approaching conditions of extreme overbought. Moreover, negative real rates, although they support long-term and growth-oriented assets, at the same time contribute to the emergence of bubbles and misallocation of capital.