NEW YORK (Reuters) - Low-yielding bond markets could abruptly “wake up” and reprice for tighter U.S. monetary policy, posing problems for the Federal Reserve as it approaches an interest rate hike, a top Fed official said on Thursday.
In an interview with Reuters, St. Louis Fed President James Bullard said the longer the U.S. central bank keeps rates near zero amid such “boom time” markets, the greater the risk of damaging asset-price bubbles over the next few years.
“There is a disconnect between markets and the Fed and that is going to be reconciled at some point. And I am a little bit concerned that one day markets will wake up” and “reprice everything,” Bullard said.
“You’ve got more of a boom time situation with low interest rates feeding into that, and I think that’s where the potential is for bubbles in the next two to three years.”
Reporting by Jonathan Spicer; Editing by Chizu Nomiyama