Fed officials wave off worries over bloodletting in equities

Federal Reserve officials played down recent turmoil in global stock markets, sounding as resolved to push ahead with gradual increases in interest rates as before the rout.

“Having a bump like this has virtually no consequence in my view of the economic outlook,” New York Fed President William Dudley said Wednesday at an event in New York. “My outlook hasn’t changed because the stock market is a little bit lower than a few days ago. It’s still up sharply from where it was a year ago.”

“That said, if the stock market were to go down precipitously and stay down, then that would actually feed into the economic outlook and that would affect my view in terms what’s the implications for monetary policy,” he said.

The S&P 500 plunged 4.1 per cent on Monday, making for almost an 8 per cent drop over six trading sessions since January 26 and triggering a wider sell-off in Asia and Europe. The US market bounced back 1.7 per cent on Tuesday but remained volatile.

“Generally, market functioning seems to be pretty good,” Dudley said. “There was a period on Friday where there was a very sharp movement downward around 3 o’clock in the equity market. That’s something we have to look at and evaluate what really caused that. But I think generally liquidity is pretty good.”

Dudley also raised questions about whether some financial products tied to market volatility were well put together.

The VIX index uses derivatives to track expected volatility in US stocks. After months of calm, it spiked in recent days, causing substantial losses for investors who had been making returns betting against its rise.