Geeks that we are we have our favorite Federal Reserve Governor and that is Richard Fisher from Texas. In a speech yesterday he outlines his ideas about cutting back on Fed purchases which have heavily influenced the stock market and the housing market. Here are some of the bullet points from his presentation on the economy, the housing recovery and Federal Reserve mortgage backed security (MBS) purchases.
Time to Reset the Fed’s Sails?
With that caveat in mind, my staff and I think there is a better-than-even chance that the present GDP growth consensus forecast of 2.4 percent by professional economists may be underestimating the underlying pace of growth.
Monetary policy is hyper-accommodative, driving interest rates to historic lows and equity markets to historic highs; if anything, it may be giving rise to excessive speculation and risk taking. (In addition to the pricing of CCC debt and the surge in low-covenant lending, margin debt is climbing rapidly.)
I have advocated that we begin to reef in the sails, beginning with our MBS purchase program. In my view, the housing market is on a self-sustaining path and does not need the same impetus we have been giving it. In recent months, under its balance-sheet expansion program, the Fed has bought about 50 percent of gross issuance of agency MBS, partly to replace prepayments of our MBS holdings. When refinancing activity eventually shifts down, the Fed could soon be buying up to 100 percent of MBS issuance if the current purchase program continues.
I think we can rightly declare victory on the housing front and reef in (or dial back) our purchases, with the aim of eliminating them entirely as the year wears on.
He goes on to note that the Federal Reserve’s action may be all for naught if the Fed does not get help on the fiscal side from Congress.
I argue that the Fed has no hope of moving the economy to full employment unless our fiscal authorities get their act together. Those economic agents with the wherewithal to expand payrolls and put the American people back to work must have confidence that our fiscal authorities and regulation makers—the legislative and the executive—will reorganize the tax code, spending habits and the regulatory regime so that the cheap and abundant money we at the Fed have made available to invest in job-creating capital expansion in the United States is put to use. Until then, I argue that the Fed is, at best, pushing on a string and, at worst, building up kindling for a massive shipboard fire of eventual inflation.
Strong stuff from a straight shooter. Fed pushing on a string. Shipboard fire? Congress is asleep at the switch. (I hope that the IRS doesn’t read my blog.) We could be on the verge of a massive melt up if the market does not pull back soon. Thanks to Congress’ inaction the sequester is serving to goose stock market gains in a roundabout way. No real inflation. No real jobs growth. Only asset price growth. Blowing bubbles. We all know how that ends. For now we dance.
Watch the US Dollar as strength continues. We are left to contemplate over the weekend the currency moves of late in the Yen and US Dollar. A stronger dollar hurts US multinationals and their earnings prospects. Other countries have their currencies pegged to the US Dollar and that will hurt them as well. The strength in the Yen hurts Japan’s competitors in the Asian region the most. Lots brewing. Currency crisis coming? Tariffs next??Looking at page 15 to see what is going to land on Page 1.
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A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.