Fed's Fisher says his FOMC vote will reflect concerns on bond buying

WASHINGTON Mon Dec 30, 2013 7:26pm EST

Federal Reserve Bank of Dallas President Richard Fisher speaks about the concept of breaking up 'too big to fail' banks to a breakout group at the Conservative Political Action Conference (CPAC) in National Harbor, Maryland, March 16, 2013. REUTERS/Jonathan Ernst

Federal Reserve Bank of Dallas President Richard Fisher speaks about the concept of breaking up 'too big to fail' banks to a breakout group at the Conservative Political Action Conference (CPAC) in National Harbor, Maryland, March 16, 2013.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - Dallas Federal Reserve Bank President Richard Fisher said his votes on the central bank's policy panel in 2014 will reflect his concern that the Fed's bond-buying risks stoking inflation and exposing the institution politically.

In an interview conducted on December 2 but posted to the Internet as a podcast on Monday, Fisher called the excess reserves piling up in the U.S. banking system potential "tinder" for inflation, and he said the central bank's plans to eventually unwind its extraordinary policies relied on an untested "theoretical exit strategy."

"I expect that my own voting behavior will reflect this concern I've just stated," Fisher said in the interview hosted by the private educational foundation Liberty Fund. "I worry about the fact that we've already painted ourselves into a corner that's going to be very hard to get out of."

Fisher, who rotates into a voting spot on the Fed's policymaking Federal Open Market Committee next month, expressed concern that as interest rates rise the Fed could begin to face paper losses on its massive portfolio.

"Will Congress remember that we made three years of substantial profits if interest rates go up ... and the market value of our portfolio declines?" Fisher asked. "My suspicion is that they would turn on us once again," he added, referring to the political attacks on the Fed in the wake of its efforts to help banks threatened by the 2007-2009 financial crisis.

The Fed has held overnight interest rates near zero since December 2008 and has roughly quadrupled its balance sheet to about $4 trillion through three massive bond purchase programs.

On December 18, the central bank said it would trim its bond purchases to $75 billion in January from a previous $85 billion per month pace as a first step toward winding the program down. Officials will need to decide whether to trim the buying pace further at their next meeting on January 28-29.

Fisher has long been among the internal critics of the program.

(Reporting by Timothy Ahmann; Editing by Cynthia Osterman)

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Comments (3)
bobz wrote:
Be smart get protection on your stock portfolio. Bear markets come out of left field.

Dec 31, 2013 3:31am EST  --  Report as abuse
AlbertLeo wrote:
Fisher’s position is political rather than economic. There is no evidence to support his concerns, only speculation. What the country needs most is growth. The Republican austerity program will move us in the direction of Europe, with higher unemployment especially among the young, and increased deficits. It’s the “cut off your nose to spite your face” school of economics/politics.

Dec 31, 2013 7:13pm EST  --  Report as abuse
lottopol wrote:
Most investors now believe three things about the Federal Reserve, money and interest rates. They think that the Federal Reserve is artificially depressing rates below what would be a “normal” level. They believe that in the process of doing so the Federal Reserve has enormously increased the supply of money and they believe that the USA is on a fiat money system.
All three of those beliefs are incorrect. One benchmark rate that the Federal Reserve has absolute control of is the rate paid on reserves deposited at the Federal Reserve. That rate is now 25 basis points, after being zero since the inception of the Federal Reserve in 1913 until recently. If the Federal Reserve had left that rate at zero t-bill rates would now be even lower than they are now. The shortest t-bills rates would now be probably negative.
Paying interest on reserves combined with the subsidy to the banks of providing free unlimited deposit insurance on non-interest bearing demand deposits is keeping t-bill rates positive. Absent those policies the rate on t-bills would be actually negative. The Chinese and others all over the world are willing to pay anything for the safety of depositing funds in the USA. Already, Bank of New York Mellon Corp. has imposed a 0.13% charge on large deposits.
An investor who believes that interest rates are headed up may respond that the rate paid on reserves is a special case and that the vast increase in the money supply resulting from the quantitative easing must result in higher rates when the Federal Reserve reverses its course. The problem with that view is that the true effective money supply is still far below its 2007 level.
Money is what can be used to buy things. Historically money has first been specie (gold and silver coins), then fiat money which is paper currency and checking accounts (M1) and more recently credit money. The credit money supply is what in aggregate can be bought on credit. Two hundred years ago your ability to take your friends out to dinner depended on whether or not you had enough coins (specie) in your pocket. One hundred years ago it depended on the quantity of currency in your pocket and possibly the balance in your checking account if the restaurant would take checks.
Today it is mostly your credit card that allows you to spend. We no longer have a fiat money system. Today we have a credit money system. Just because there is still some fiat money does not negate the fact that we are on a credit money system. When we were on a basically fiat money system there was still a small amount of specie in circulation. Even today a five cent piece contains about 5 cents worth of metal, but no one would claim we are still on a specie money system.
Fiat money is easy to measure; M1 was $1.376 trillion in 2007 and was $2.535 trillion in May 2013. The effective money supply is the sum of fiat money and credit money. Credit money cannot be precisely measured. However, When the person in California whose occupation was strawberry picker and who had made $14,000 in his best year was able to get a mortgage of $740,000 with no money down and private equity could buy a company like Clear Channel in a $20 billion leveraged buyout, also with essentially no money down, the credit money supply was clearly much higher than today. A reasonable ballpark estimate of the credit money supply is that it was $70 trillion in 2007 compared to $50 trillion today.
The effective money supply is the sum of the traditional fiat money aggregates plus the credit money supply. Thus, despite the clams of Ron Paul and Rick Perry to the contrary, the effective or true money supply has fallen drastically over the last few years….”

Jan 02, 2014 10:08pm EST  --  Report as abuse
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