Prices of stocks and other assets have soared in recent weeks, but Federal Reserve Chair Jerome Powell on Wednesday said the central bank's zero interest rate policy was not entirely to blame.
"If you look at what's really been driving asset prices... in the last couple of months, it isn't monetary policy. It's the expectations about vaccines, and it's also... fiscal policy," he said at a press conference after concluding the Fed's two-day policy meeting.
The US Congress last year approved two stimulus packages aimed at combating the Covid-19 pandemic, one costing $2.2 trillion and another amounting to $900 billion. President Joe Biden, who took office last week, is pushing for another $1.9 trillion plan.
While monetary policy "does play a role," Powell said, the stimulus measures and vaccines "are the news items that have been driving asset values in recent months."
The Fed chief's comments about a "highly uncertain" economic outlook appeared to prick the nascent asset bubble, with major US stock indices dropping more than two percent by the close of trading.
Traders have been astounded in recent days by the surge in struggling video game retailer GameStop's share price, after a group of amateur investors banded together over the online platform Reddit to fight the Wall Street funds that had pushed its price lower.
The Securities and Exchange Commission (SEC) as well as the White House each issued statements on Wednesday saying officials are monitoring the volatility in stock markets.
"Our economic team including (Treasury) Secretary (Janet) Yellen and others are monitoring the situation. It's a good reminder, though, that the stock market isn't the only measure of the health of our economy," White House spokeswoman Jen Psaki told reporters.
The SEC said it is working with other regulators "to assess the situation" and the actions of market players as part of "our mission to protect investors and maintain fair, orderly, and efficient markets."
Powell said the central bank's main tool for keeping tabs on risky behavior is through financial market supervision and regulation, although he would not, in theory, rule out using higher interest rates to address inflated asset prices.
But the question remains as to whether trying to deflate an asset bubble through higher rates would do more harm than good, since that could reduce economic activity, he said.