Fed and Bernanke conflict may lead to crash: Roubini

In an interview to CNBC-TV18, Arnab Das of Roubini Global Economics said that Ben Bernanke's testimony and the minutes of the Federal Open Market Committee (FOMC) meeting sent out mixed signals which may fuel an asset price bubble.

He added that if the Fed and Bernanke continue to be nuanced, then the markets might witness a stronger crash later rather than just a correction on the way. Also read: Bernanke was being dovish: StanChart's Sarah Hewin Below is the edited transcript of his interview with CNBC-TV18 Q: What do you make of the signals that we got from the Federal Reserve yesterday? The comments that were made by Fed chairman Ben Bernanke, slightly confusing if I may say so than the minutes of the Federal Open Market Committee (FOMC) meeting which seem to indicate that many members are keen to start talking of a cut back?
A: The main issue is that the testimony said one thing and the question and answer said the opposite. One signalled that the easing would continue and the other that there may be a tapering. The two-sided nature of these comments reflects what happened both in recoveries that are taking hold and in deteriorating conditions.
There is a conflicting noise and signal in the data. So policy makers often find the need to be somewhat nuanced and internally conflicted in the signals that they are sending.
These issues are even further exacerbated then in a normal situation by the fact that many people around the world in policy-making circles, in the board of the Fed, in Bank for International Settlements (BIS), the International Monetary Fund (IMF) and including ourselves have been quite concerned that the nature of the policy response is indeed to stoke an asset price bubble.
So the Fed and Bernanke needs to be quite careful and nuanced in not allowing things to get out of hand because when monetary policy is eventually tightened, which will still be some time off, then there might be a bit of a crash in asset markets which may be starting already in Japan.
Alternatively, if they keep the spigot open and send a verbal signal that things will continue to be pumped up for as long as it takes, markets might really become very frothy and have a bubble and a much stronger crash later on rather than just a correction along the way.
So we are getting both signals from the Fed and we are getting concerns about both sides of the story from somewhat more impartial sources like the BIS, IMF and even RGE. We are quite concerned that bubble conditions may eventually develop. Hopefully this will calm things down.
There is a long period of adjustment ahead. The first step will be confirmation in the data which is still sending mixed signals; confirmation that recovery is taking hold despite the fiscal adjustment in US and other countries.
Then, a tapering of the monetary accommodation which just means a slowdown in the rate at which the stock of money and the Fed's balance sheet are growing, not an actually stock in that growth let alone a revisal in that growth, or even an increase in the price of money through the Fed's fund rate or the interest rate on excess reserves.
So there are lot of steps to go before all of this is unwound, the extraordinary monetary accommodation and along the way there will be corrections and this is one of them. It is very bad in some places that have had a very high kind of response to monetary accommodation.
If you want to talk about Japan specifically that one has been exposed quite a lot for very specific reasons. Firstly as it is the market that had the most uplift in the Nikkei. Secondly because part of the story in Japan, a big part of it is weakening of the yen or a consequence of easing of monetary policy weakening the yen; restoring the external price competitiveness of the Japanese export sector which would be making hay out of the recovery first and foremost in the US.
If that recovery is going to slow down because monetary emission is being reduced or the speed of it is being reduced in the US, then Japan stands out as a good place to take some profits because may be the lift to exporters from Japan will be as great as if both the yen have been weakened through Japanese easing and the American easing had continued on its expected trajectory.