EISEN: George Soros told the European parliament this week Brexit has unleashed a crisis in the financial markets comparable in severe toy 2007/2008. Is he wrong?

FISCHER: George Soros has made a lot of money in the markets so he's been right quite often. I don't particularly want to comment on whether he's right or wrong this time.

The Wilshire 5000 – it was increasing at a rapid pace all through 2013, 2014, up until January 2015. If it had continued up at that same pace, we'd be sitting here talking today about a bubble in U.S. equities. That isn't what happened. It sold off. Now we're about 10 percent down from where we were January 2015. I think that's probably better pricing on U.S. equities.

The large movements in asset prices likely reflect increased concern about the global outlook, particularly ongoing developments in China and the effects of the declines in the prices of oil and other commodities on commodity-exporting nations. Asset price declines may also reflect a reassessment of the prospects for growth in Europe and Japan, and perhaps also a recognition that U.S. gross domestic product and productivity growth have remained stubbornly low.

If the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years--including in the second half of 2011--that have left little visible imprint on the economy, and it is still early to judge the ramifications of the increased market volatility of the first seven weeks of 2016.

"One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting," said Dudley, a permanent voter on the Federal Open Market Committee, the Fed's monetary policy arm.

"So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision," he said.

Federal Reserve Bank of Kansas City President Esther George said recent financial-market turmoil should not have been surprising and is no reason to delay further interest-rate increases.

“While taking a signal from such volatility is warranted, monetary policy cannot respond to every blip in financial markets,” George, who votes on policy this year, said in prepared remarks in Kansas City, Missouri. “The recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond-buying policies focused on boosting asset prices as a means of stimulating the real economy.”

Increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.

Last week we saw a global selloff in stock markets apparently triggered by data from China that fell short of expectations. The bearish environment was compounded by tensions between Iran and Saudi Arabia, the bomb test claimed by North Korea, and lower oil prices. When such volatility develops, I think it's helpful to look at the real economy of the United States (as opposed to the financial economy) and ask if something is fundamentally wrong. Are there serious imbalances that make the broad economy vulnerable to foreign shocks? I don't see that kind of connection in current circumstances.

"I am unconvinced that monetary policy should be used as an explicit tool" for stabilizing financial markets, Williams said at the American Economic Association. "The tradeoffs are not favorable at all" in terms of reaching the Fed's goals of stable inflation and full employment, and indeed, targeting financial stability with rate policy could end up undermining the Fed's credibility on its inflation goal.

At [the October 27-28] meeting, the Fed removed language it had inserted in its September statement expressing concern that global weakness could hinder U.S. growth and further depress inflation. Until China's surprise devaluation of its currency on Aug. 11 sent financial markets into a tailspin, the Fed had been expected to begin raising rates in September.

In his interview with the AP, Williams said the Fed had been correct to note these developments in its September statement. But since then, he said, markets have stabilized.

"What has happened in the last six weeks is that volatility has come down," Williams said. "I think the uncertainties, risks, seem to have ebbed."

I am starting to see signs of imbalances emerge in the form of high asset prices, especially in real estate, and that trips the alert system. One lesson I have taken from past episodes is that, once the imbalances have grown large, the options to deal with them are limited. I think back to the mid-2000s, when we faced the question of whether the Fed should raise rates and risk pricking the bubble or let things run full steam ahead and deal with the consequences later. What stayed with me were not the relative merits of either case, but the fact that by then, with the housing boom in full swing, it was already too late to avoid bad outcomes. Stopping the fallout would’ve required acting much earlier, when the problems were still manageable. I’m not assigning blame by any means, and economic hindsight is always 20/20. But I am conscious that today, the house price-to-rent ratio is where it was in 2003, and house prices are rapidly rising. I don’t think we’re at a tipping point yet—but I am looking at the path we’re on and looking out for potential potholes.

“I've got a message for your friend Jim Cramer. The Fed cannot permanently raise stock prices. The idea that the Fed is going one way or the other, and this is what's driving the stock market, is not true. He's one of the great people at looking at businesses, how good is this business, what's the profitability of the business, what's this thing worth? And to have him cheerleading for lower rates 24-hours a day is, I think, unsavory.”

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Bullard outlined his case to Cramer. "We're at zero [percent] policy rates and we're at [a] $4.5 trillion balance sheet when the unemployment rate was right on top of the committee's estimate of the natural rate." He also said inflation is showing signs of picking up.

"We have vanquished all our foes. It's time to get off the emergency settings," Bullard added.

Developments in China appeared to have heightened uncertainty regarding future economic growth and macroeconomic policy there, which seems to have prompted higher financial market volatility in developed market economies. At times of market turbulence one must maintain a deep respect for the divergent ways in which events could conceivably unfold, and thus I will not pretend I can foretell the future.

Nevertheless, it is worth observing that the direct implications of recent developments for economic fundamentals in the United States appear to be quite limited. If so, then recent market developments will have only limited implications for the appropriate path of monetary policy. This might seem to contradict widespread conjecture about the Fed delaying liftoff due to market turbulence. But I would point out that the Fed has a history of overreacting to financial market movements that seem unconnected to economic fundamentals. The events of 1998-99 are a case in point, when financial developments in emerging markets generated substantial U.S. market volatility despite limited identifiable implications for U.S. growth. The FOMC cut rates three times but ended up taking back those cuts the following year.

“I know there are a lot of worries about global growth, a lot of it coming from China,” Bullard, who votes on monetary policy next year, said Friday in a SiriusXM Business Radio interview. “I would probably be more sanguine than the market in that dimension.”

He also said the Fed doesn’t react directly to equity markets, as the Standard & Poor’s 500 Index headed toward its worst week in three years.

Recalling the tech bubble in the 1990s and the housing bubble of the 2000s, he said: "Zero [interest rates] is too low in that kind of environment. I wouldnt be comfortable with that. A zero rate would feed into an asset price bubble".

"When asset bubbles start, they keep going until they blow up out of control with devastating consequences." [Financial Times]

[T]here is a perception that FICC markets and their participants are highly sophisticated and do not need protection. While that may be generally true, the perspective is too narrow, because the importance of these markets extends far beyond the largest participants in them. The market mechanism allocates credit and determines the borrowing costs of households, companies and governments. Proper market functioning is really a public good that relies on confidence and trust among market participants and the public. Bad conduct, weak internal firm governance, misaligned incentives, and flawed market structure can all place this trust at risk.
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The Dodd-Frank Act also imposed rules requiring greater transparency in over-the-counter derivatives markets through the use of central clearing, trade repositories, and swap execution facilities. Given the issues around OTC derivatives during the recent crisis, these clearly are important initiatives. But despite significant progress, there are still a number of impediments to sharing trade report data across regulatory agencies and jurisdictions, leaving us with only a piecemeal picture of the overall market rather than the full transparency that we desire.
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With surveillance and penalties in place, and a new administrator, one might be excused for thinking that there is nothing more to be done {about LIBOR}. In fact, some people do think that. That is emphatically not the view of the FSB Official Sector Steering Group that I now co-chair with Martin, which concluded that it is essential to develop one or more risk free (or near risk free) alternatives to LIBOR for use in financial contracts such as interest rate derivatives. The reasons are related to the structure of both LIBOR and the market that underlies it. Unsecured interbank borrowing has been in a secular decline for some time, and there is a scarcity, or outright absence in longer tenors, of actual transactions that banks can use to estimate their daily submission to LIBOR or that can be used by others to verify those submissions. LIBOR is huge--there are roughly $300 trillion in gross notional contracts that reference it--so the incentives to manipulate it still remain in place. And the structural problems go much further than the incentives for manipulation. Markets need to be fair, effective, and also safe. If the publication of LIBOR were to become untenable because the number of transactions that underlie it declined further, then untangling the outstanding LIBOR contracts would entail a legal mess that could endanger our financial stability.

For these reasons, the Federal Reserve has convened a group of the largest global dealers to form the Alternative Reference Rates Committee. We have asked them to work with us in promoting alternatives to U.S. dollar LIBOR that better reflect the current structure of funding markets. As the Review's consultation document notes, issues of this kind are really global in nature; U.S. dollar LIBOR contracts are traded throughout the world, not simply in the United States. For this reason we are working in close consultation with our foreign regulatory counterparts in this endeavor.