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 In a speech in Mexico City, Dallas Fed President Richard Fisher
amplified some lingering concerns that the central bank's policy
stimulus is stoking asset-price bubbles that "may result in tears"
for investors acting on bad incentives.
"There are increasing signs quantitative easing has overstayed its
welcome: Market distortions and acting on bad incentives are
becoming more pervasive," he said of the asset purchases, which are
sometimes called QE.
"I fear that we are feeding imbalances similar to those that played
a role in the run-up to the financial crisis," he said in prepared
remarks to the Association of Mexican Banks.
Fisher, a voter on U.S. monetary policy this year, also praised
Mexico's moves to stimulate growth in the wake of the global
recession. As for the United States, he repeated criticisms that the
government has failed to take advantage of the five years of easy
Fed money, missing its opportunity to restructure debt and to reform
entitlements and regulations.
The central bank has kept interest rates near zero since late 2008
and has bought more than $3 trillion in Treasury and mortgage-based
bonds to lower longer-term borrowing costs, and stimulate hiring and
growth.
The U.S. economy expanded at a decent 2.4 percent rate in the fourth
quarter but has slowed this year thanks in part to severe winter
weather.
"I do think we have had some short-term weather impact but that can
turn around very quickly," Fisher said, adding that warmer
temperatures would boost consumption and industry.
Though the Fed under new Chair Janet Yellen has taken the first few
steps to trim its bond buying, which now runs at $65-billion per
month, worries are growing that all the stimulus has driven
investors to take risks that could destabilize financial markets.
Fisher, an outspoken policy hawk, pointed to soaring margin debt and
the narrow spreads between corporate and Treasury debt as areas of
concern.
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In the stock markets, he said price-to-projected-earnings,
price-to-sales ratios, and market capitalization relative to GDP are
all at "eye-popping levels not seen since the dot-com boom" of the
late 1990s.
"We must monitor these indicators very carefully so as to ensure
that the ghost of 'irrational exuberance' does not haunt us again,"
he said, borrowing former Fed Chairman Alan Greenspan's line warning
about the tech-asset bubble.
For now, the Fed is in no rush to raise rates and is only gradually
trimming the bond purchases, which over the past few years have
swelled its balance sheet to more than $4 trillion.
Fisher said that while the Fed has no "clear plan" for draining some
of the $2.5 trillion in reserves that have built up at banks, he was
confident the Fed would find a "practicable" way to normalize its
balance sheet and avoid inflation.
"The real tools that we are focusing on are how we manage the exit
from the current hyper-accommodative monetary policy and how do we
make sure ... that we do it in a way that doesn't allow the current
very large and presently non-inflationary monetary base ... from
becoming inflationary," he said following his speech.
(Reporting by Alexandra Alper; writing
by Jonathan Spicer; editing by Diane Craft and Eric Walsh)
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