Posted on 05/23/2009 9:39:08 AM PDT by rabscuttle385
The president of the Dallas Fed on inflation risk and central bank independence.
BY MARY ANASTASIA O'GRADY
Dallas
From his perch high atop the palatial Dallas Federal Reserve Bank, overlooking what he calls "the most modern, efficient city in America," Richard Fisher says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now.
His bigger concern these days would seem to be what he calls "the perception of risk" that has been created by the Fed's purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper.
Mr. Fisher acknowledges that events in the financial markets last year required some unusual Fed action in the commercial lending market. But he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be "the handmaiden" to fiscal profligacy. "I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program."
(Excerpt) Read more at online.wsj.com ...
Someone better hurry up and tell the Fed Head to knock it off. Seems we've already monetized government stupidy, er, um, I mean "largess."
I dont thin k most Americna even know what uis oging on.
Every bill of money in your hand is debt the govt is promising to pay to bearer - if and when ever delivered.
We are living on borrowed money, borrowing more money everytime the fed prints more money, and paying the interest on it by printing more money (debt) because the Chinese and others- have stopped buying our debt!!!
And zerO has the audactity to introduce a 3.4 TRILLION budget full of pork and untried unproven ever-cost increasing programs.
People need to be told the govt is using one credit line to pay off another! I believe the term for the little people is “kiting”
Set up a parallel Fed?
After the Chrysler fiasco - I suspect anything is possible.
Better close the barn door before the horses get back in.
No kidding.
Am I to assume that “Monetize The Debt” is akin to “Immamentize The Eschaton”?
I think not. Such monetization is more like a company diluting its share structure because of financial necessity, even if that situation is a result of poor management rather than circumsatnce. To survive, the firm must dilute.
So let the Fed monetize away! Own some gold and some gold stocks and move on.
***Don’t Monetize the Debt***
Too late.
Horse already left the barn alert.
Our political leaders “have dug in incurring unfunded liabilities of retirement and health-care obligations” that “we at the Dallas Fed believe total over $99 trillion.”
—————> $99 Trillion.
“Regarding what caused the credit bubble, he repeats his assertion about the Fed’s role: “It is human instinct when rates are low and the yield curve is flat to reach for greater risk and enhanced yield and returns.” (Later, he adds that this is not to cast aspersions on former Fed Chairman Alan Greenspan and reminds me that these decisions are made by the FOMC.)
“The second thing is that the regulators didn’t do their job, including the Federal Reserve.” To this he adds what he calls unusual circumstances, including “the fruits and tailwinds of globalization, billions of people added to the labor supply, new factories and productivity coming from places it had never come from before.” And finally, he says, there was the ‘mathematization’ of risk.” Institutions were “building risk models” and relying heavily on “quant jocks” when “in the end there can be no substitute for good judgment.”
What about another group of alleged culprits: the government-anointed rating agencies? Mr. Fisher doesn’t mince words. “I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside.” He says he also saw this “inherent conflict of interest” as a fund manager. “I never paid attention to the rating agencies. If you relied on them you got . . . you know,” he says, sparing me the gory details. “You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That’s why we never relied on them.” That’s a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio.”
Whether we will experience run-away inflation or not is a policy choice. Massively increasing the money supply hasn't created inflation yet because the velocity of money is down to historic lows. All the Fed has to do to prevent inflation in the future is to gradually reduce the money supply as velocity increases, which will inevitabily happen as the economy starts to recover.
Having worked at the Fed for a couple years, I saw that the Fed has a firm institutional conviction not to repeat the experience of the late 1970's and early 1980's, even if it means prolonging the recession. They know the consequences of letting inflation get out of hand.
That being said, we're dealing with human beings here, so there can be no certainty. Bernanke has the ability to pull out all the money he created to stop inflation dead in its tracks should it rear its ugly head. It's all a question of whether he has the guts to do it. I think he does, but no one can know for sure.
What if it isn't so easy for the Fed to reduce the money supply? Worldwide, investors are starting to realize that US Treasuries are crap. And what else can the Fed sell - the toxic crap they took from the banks?
I don't know... add this to the fact that Bernanke will not want to stop a recover early and I think it's highly likely we're going to see 70's style inflation again, or worse.
It's very easy. All they have to do is start selling the bonds they've purchased and stop rolling over the repo and other short-term loans they've made.
Worldwide, investors are starting to realize that US Treasuries are crap.
The article overstates its case by a long-shot. Crap does not sell with a yield of less than 4%. Yes, yields on long-term bonds have gone up (most likely because markets expect higher interest rates in the future), but 3.95% is still a pretty low yield by historical standards.
And what else can the Fed sell - the toxic crap they took from the banks?
Treasuries. The vast majority of the assets on the Fed's books are either Treasuries or loans collateralized by Treasuries.
But that's my point. To an investor, US Treasuries represent loans payable in future dollars. What if the dollar itself is seen as the problem?
The dollar has dropped recently. The market is concerned about it's future purchasing power and with good reason. Federal deficits, both current and future, are enormous and can't be met entirely through taxes or loans so the Fed is buying treasuries. The US economy is a mess. FedGov is intervening in business to an unprecedented degree. All of this concerns those who invest in the future value of the dollar.
I tend to agree that we won't see much price inflation in the short term. But that's because I think it's going to take quite some time for the economy to recover due to the current actions of FedGov and the Fed.
The massive deficit causes a dilemma for the Fed. When the Fed engages in easing, investors see it as dollar weakening and treasury interest rates will need to rise in order to attract lenders. But if the Fed doesn't ease, then treasury interest rates will have to rise to attract enough lenders to cover the enormity of the treasury sales. Especially now. Foreign lenders are getting queasy and they are also getting fewer dollars to invest from trade due to our economy. That long bond interest rates will continue to rise no matter what the Fed does seems a good bet. They have to. Corporate interest rates will have to rise too before investors with real capital will return to the market and the market can only then start to recover.
I think inflation is a big risk on the back side of this. The longer it takes for the US economy to recover - and I think it may take years - the less likely will the Fed be to pull back as things finally start to heat up.
If the Fed starts selling its portfolio of Treasuries, the supply of dollars will fall, arresting any notion that the dollar is a problem.
The dollar has dropped recently.
Not that much. We have a floating exchange rate, and it tends to fluctuate. The recent drop is nothing unusual.
The market is concerned about it's future purchasing power and with good reason.
I don't seem much evidence of that, yet.
Federal deficits, both current and future, are enormous and can't be met entirely through taxes or loans so the Fed is buying treasuries.
Future deficits can be made manageable by doing simple thinks like means-testing medicare and raising the retirement age to 70.
The US economy is a mess. FedGov is intervening in business to an unprecedented degree.
Can't argue with you there.
All of this concerns those who invest in the future value of the dollar.
Perhaps a little, but not much, yet.
The massive deficit causes a dilemma for the Fed. When the Fed engages in easing, investors see it as dollar weakening and treasury interest rates will need to rise in order to attract lenders. But if the Fed doesn't ease, then treasury interest rates will have to rise to attract enough lenders to cover the enormity of the treasury sales. Especially now.
To avoid inflation, the Fed will have to tighten, or at least stop easing, which will lead to higher interest rates in the future. There's no doubt about that. The sharp upward slope in the yield curve largely reflects that expectation. There's not much evidence that inflation expectations are very high right now, however.
Corporate interest rates will have to rise too before investors with real capital will return to the market and the market can only then start to recover.
I don't think that's necessarily true. Corporate yield spreads are at all-time highs right now due to very low risk tolerance in the markets. As the economy recovers, and it's starting to, risk tolerance will go up and spreads will come down (it's already happening). That's going to offset the increase in treasury rates that's coming. As a result, I don't think we'll see much net change in corporate borrowing rates.
I think inflation is a big risk on the back side of this.
I disagree. Having worked at the Fed, I have seen the culture there. There is no way they are going to allow a repeat of the 1970's. It's entirely within the Fed's power to prevent inflation when the economy picks up again, and I believe they will act accordingly.
The longer it takes for the US economy to recover - and I think it may take years - the less likely will the Fed be to pull back as things finally start to heat up.
The slower the recovery, the less need to pull back. The extra liquidity the Fed pumped into the economy will not put upward pressure on prices until the velocity of money starts picking up again. If the recovery is very slow, the velocity of money will not increase very quickly, reducing the need to pull back liquidity.
Not that much. We have a floating exchange rate, and it tends to fluctuate. The recent drop is nothing unusual.
I dunno, this looks a just a little unusual:
The yield on the 2 year note increased 2 basis points to 0.97 percent. The yield on the 3 year note climbed 3 basis points to 1.49 percent. The yield on the 5 year note soared 11 basis points to 2.41 percent. The yield on the 10 year note catapulted 17 basis points higher to 3.72 percent. The yield on the bond rocketed 14 basis points to 4.63.
The 2year/10 year spread is a record 275 basis points.
The 2year/30 year spread is 366 basis points. The record on that is 369 on October 05 1992 at about 1130 AM. I am a very sick man!!!
Having worked at the Fed, I have seen the culture there. There is no way they are going to allow a repeat of the 1970's. It's entirely within the Fed's power to prevent inflation when the economy picks up again, and I believe they will act accordingly.
Those guys at the Fed are indeed smart, and I'm sure they want to do the right thing, no doubt. But they didn't even see the housing bubble and they had much to do with causing it. You have a lot more faith in them than I do. I do hope you're right and I'm wrong. Meanwhile, I think I'll play it safe and buy gold.
Yes, the yield curve is very steep, but that does not necessarily indicate inflation expectations. Rather, it reflects expectations that interest rates will be going up. I agree that they are going to go up, but not because of inflation. The are going to go up because the Fed is going to start pulling out liquidity like crazy.
As to the housing bubble, yes, it's true, the Fed did not see it, but that's not what they were watching out for. The Fed worries (at least back then) about consumer price inflation, not about asset bubbles.
Asset bubbles are much harder to detect than inflation, and it's not entirely clear that the Fed should worry about asset bubbles. But no one doubts about its role at preventing inflation.
Bond and long note purchases are down because of inflation expectations. Investors expect the Fed to monetize. And the Fed is in a pickle. The more they buy (trying to keep interest rates down) the more investors fear inflation. If they don't buy then interest rates rise due to the sheer magnitude of the Treasury borrowing. This is what's happening.
But no one doubts about its role at preventing inflation.
Well, I do and so do many others. The Fed not only doesn't prevent inflation, they cause it. The dollar has lost more than 95% of it's value since the Fed's inception. To suggest that the Fed prevents inflation is exactly 180 degrees from reality.
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