Dallas Federal Reserve Bank President Richard Fisher Wednesday night warned again that the Fed’s aggressive bond buying, intended to spur faster economic growth, is causing distortions in the financial markets and encouraging pre-2008 financial crisis risky behavior.
“There are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive,” the outspoken Fisher said in remarks prepared for delivery to the Association of Mexican Banks in Mexico City.
And Fisher, who is a voter on the Federal Open Market Committee this year, said, “I certainly believe that continuing to pare back on the amount of the Fed’s large-scale asset purchases is a good start and should be continued at a measured pace that leads to their complete elimination as soon as is practicable.”
The Fed is currently buying $65 billion a month in Treasury and mortgage bonds, and Fisher voiced his concern that the central bank is “feeding imbalances similar to those that played a role in the run-up to the financial crisis.”
“With its massive asset purchases, the Fed is distorting financial markets and creating incentives for managers and market players to take increasing risk, some of which may result in tears,” he added.
“Margin debt is pushing up against all-time records. And, in the bond market, narrow spreads between corporate and Treasury debt reflect lower risk premia on top of already abnormally low nominal yields,” Fisher said. “We must monitor these indicators very carefully so as to ensure that the ghost of ‘irrational exuberance’ does not haunt us again.”
The unconventional actions taken by the Fed since 2008 have put it in unchartered territory, Fisher said, leading to the creation of massive excess bank reserves “without a clear plan for how to drain them when the time comes.”
There is also the challenge of draining said reserves while keeping inflation expectations stable, he continued, although the Dallas Fed chief believes the FOMC will find “practicable ways” to normalize the Fed’s balance sheet.
“I believe that practicable ways will be found to avoid inflationary pressures once the velocity of money returns to precrisis levels,” he added.