Concern over stock market values is growing at the Fed, with one official worrying that waiting too long to tighten policy could have more serious effects later.
In an essay released Monday, Dallas Fed President Robert Kaplan warned about "excesses" in the economy, pointing specifically to stocks and the government debt. The S&P 500 market cap is at 135 percent of GDP, the highest since 1999-2000, just as the dot-com bubble was about to pop, the central banker said.
"I am aware that, as excesses build, we are more vulnerable to reversals which have the potential to cause a rapid tightening in financial conditions, which in turn, can lead to a slowing in economic activity," Kaplan wrote.
"Measures of stock market volatility are historically low. We have now gone 12 months without a 3 percent correction in the U.S. market.," he added. "This is extraordinarily unusual."
His comments echoed those made at the Federal Open Market Committee's most recent policy meeting on Oct. 31-Nov. 1. Minutes from that session, released last week, showed members concerned about "imbalances" in the financial markets that ultimately could lead to a "sharp reversal" that would have substantial effects.