Michael Darda of MKM Partners makes the case that concerns over financial stability are overblown and miss the forest for the trees. Consequently, he worries that the Fed may be pulling back too soon.
[I]t is not at all clear that 1) risk premiums are too low, 2) leverage is problematic and that 3) “easy money” leads to “bubbles”. However, unemployment, underemployment and long-term unemployment remain high while inflation, if anything, is too low (and well below the Fed’s target). Thus, there would seem to be inordinate risks to the Fed pulling back sooner than would otherwise be the case due to potentially faulty “financial stability” concerns.
One way of framing this discussion is that a necessary (but not sufficient) condition for monetary policy to contribute to the buildup of financial imbalances is for the expected path of the federal funds rate to be below its natural rate level. Most evidence indicates that this has not been the case over the past few years. Rather, it is more likely the natural rate has been negative and below the actual interest rate for some time. If so, the Fed has been contributing to financial instability by being too tight, not too loose.
Below are the slides where Michael Darda makes his case. Take a look (link):