Fed's Fisher: Margin Investors
Tread a Risky Path
Wednesday, 12 Feb 2014 07:10 PM
Federal Reserve Bank of Dallas President Richard
Fisher said U.S.
banks and stock market investors using debt may be taking excessive risks,
prompted partly by the Fed’s record-low interest rates.
Margin debt, or borrowing to finance stock
purchases, is “near an all-time high,” Fisher said Wednesday in an interview at
the Dallas Fed. “My background tells me that is usually a dangerous
predicament. That doesn’t mean the world is coming to an end, but it tells you
markets can reverse.”
Fisher, who votes on policy this year,
agreed with Fed Chair Janet Yellen’s congressional testimony Tuesday that there
are currently no signs of asset price bubbles in the U.S. Still, near-zero interest
rates set by the Federal Open Market Committee have
increased competition among lenders seeking borrowers with good credit, while
making it easier for troubled companies to get loans, he said.
“Everyone is reaching to take advantage of
this environment,” Fisher said, who has favored ending bond purchases by the
Fed. “I worry about that. I talk about that in the FOMC. That is something I
have urged us to watch as an indicator of whether we have poured too much
gasoline on the fire.”
The Standard & Poor’s 500 Index was
little changed Wednesday after the best four-day rally in a year, while the
yield on the 10- year Treasury note rose 0.04 percentage point to 2.76 percent
in New York.
Money Borrowed
The amount of money borrowed from
brokerages that do business on the New York Stock Exchange to buy shares surged
35 percent last year to a record $444.9 billion as of Dec. 31. Margin debt, as
the borrowing is called, has almost doubled from $230.9 billion as of the end
of 2009, NYSE data show.
Yellen in her testimony said she
recognizes that low rates may help create asset price bubbles. While the Fed’s
ability to detect distorted prices is “not perfect,” she said valuation
measures don’t suggest asset prices “broadly speaking are in bubble territory.”
Fisher said companies with low credit
ratings can sell debt today even after indicating they “will have to be
reorganized, or are in bad shape.”
“The junk market is very richly priced,”
Fisher said. Leveraged loan activity is “fairly significant,” he said.
“The big banks are crawling all over here”
to make loans, and terms are “hyper-competitive,” he said.
Overall Activity
The overall activity “just indicates to me
some mistakes can be made by the lender or the investor,” he said. “We have to
be mindful of the fact that accidents can happen. We don’t want to be
responsible for that from a policy standpoint.”
Fisher said he was pleased by Yellen’s
endorsement of scaling back stimulus in “measured steps” and signaling that the
bar is high for a change in that plan.
Only a “notable change in the outlook” for
the economy would prompt policy makers to slow the pace of tapering, Yellen
said in response to a lawmaker’s question Tuesday.
Tapering will continue “unless we see some
dramatic sudden reversal” in the economy, Fisher said.
St. Louis Fed President James Bullard said
Fed officials will probably be careful about altering the pace of their reductions
to bond buying because of a potentially significant impact on markets.
“If we move off our baseline, it’s going
to have pretty big repercussions,” Bullard said Wednesday in an interview at
Bloomberg’s headquarters in New York.
“We’d be cautious in using that — it’s going to have to be a situation where
you’re pretty sure things are moving off track.”
Accelerating Growth
Fisher said he’s confident economic growth
will accelerate this year. Weak economic data recently is the result of harsh
winter weather, he said.
Some business leaders have told Fisher,
“‘we are ready to roll,’” he said. “I just sense more confidence.”
Fisher said Wednesday he believes the Fed
should consider altering its statement on when it would consider raising the
main interest rate. Its current statement that it will probably hold the
benchmark rate near zero “well past” a decline in unemployment below 6.5
percent may need to be adjusted after a drop in the jobless rate last month to
6.6 percent, he said.
“I am in favor of exploring this,” Fisher
said. “I think we should flesh that out further, but do so in a very deliberate
manner.”
Fisher, a former money manager and deputy U.S. trade
representative, has been president of the Dallas Fed since 2005. In 2011, he
dissented twice against efforts to push down long- term borrowing costs and
keep the benchmark interest rate near zero for a prolonged period. He voted in
favor of tighter policy five times in 2008. His district includes Texas, northern Louisiana
and southern New Mexico.
Richard Fisher
Richard
W. Fisher is the president of the Federal Reserve Bank of
Dallas, an alternate member for the Federal Open
Market Committee, a director at the American
Council on Germany, and was the vice chairman for Kissinger McLarty Associates.
Note: Henry A. Kissinger
is a director at the American Council on
Germany, a director at the Atlantic
Council of the United States (think tank), an overseer at the International Rescue Committee, a member of
the Bohemian Club, a director at the
American Friends of Bilderberg
(think tank), was a co-founder for Kissinger McLarty
Associates, a lifetime trustee at the Aspen Institute (think tank), and a 2008 Bilderberg conference participant (think
tank).
Open
Society Foundations was a funder for the Atlantic
Council of the United States
(think tank).
George Soros
is the founder & chairman for the Open Society Foundations,
and was the chairman for the Foundation to Promote Open
Society.
Foundation
to Promote Open Society was a funder for the International Rescue Committee, and the Aspen Institute (think tank).
Henrietta
Holsman Fore is a trustee at the Aspen Institute (think
tank), and a member of the Belizean Grove.
No comments:
Post a Comment