Monday, July 28, 2014

Dallas Fed Prez Comes Out Blasting Against Fed Chair Yellen

By Robert Wenzel

Richard  Fisher, president of the Federal Reserve Bank of Dallas, delivered a speech earlier this month at the University of Southern California's Annenberg School for Communication & Journalism. It was a direct attack on the current easy money policy of the Fed.

He said, in part:
Let me cut to the chase: I am increasingly concerned about the risks of our current monetary policy. In a nutshell, my concerns are as follows:

First, I believe we are experiencing financial excess that is of our own making. When money is dirt cheap and ubiquitous, it is in the nature of financial operators to reach for yield...

I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose too long...

I was uncomfortable with QE3, the program whereby we committed to a sustained purchase of $85 billion per month of longer-term U.S. Treasury bonds and mortgage-backed securities (MBS). I considered QE3 to be overkill at the time, as our balance sheet had already expanded from $900 billion to $2 trillion by the time we launched it, and financial markets had begun to lift off their bottom. I said so publicly and I argued accordingly in the inner temple of the Fed, the Federal Open Market Committee (FOMC), where we determine monetary policy for the nation. I lost that argument. My learned colleagues felt the need to buy protection from what they feared was a risk of deflation and a further downturn in the economy. I accepted as a consolation prize the agreement, finally reached last December, to taper in graduated steps our large-scale asset purchases of Treasuries and MBS from $85 billion a month to zero this coming October. I said so publicly at the very beginning of this year in my capacity as a voting member of the FOMC. As we have been proceeding along these lines, I have not felt the compulsion to say much, or cast a dissenting vote.

However, given the rapidly improving employment picture, developments on the inflationary front, and my own background as a banker and investment and hedge fund manager, I am finding myself increasingly at odds with some of my respected colleagues at the policy table of the Federal Reserve as well as with the thinking of many notable economists...

[W]ith low interest rates and abundant availability of credit in the nondepository market, the bond markets and other trading markets have spawned an abundance of speculative activity. There is no greater gift to a financial market operator—or anyone, for that matter—than free and abundant money. It reduces the cost of taking risk. But it also burns a hole in the proverbial pocket. It enhances the appeal of things that might not otherwise look so comely. I have likened the effect to that of strapping on what students here at USC and campuses elsewhere call “beer goggles.” This phenomenon occurs when alcohol renders alluring what might otherwise appear less clever or attractive. And this is, indeed, what has happened to stocks and bonds and other financial investments as a result of the free-flowing liquidity we at the Fed have poured down the throat of the economy.
Then he went directly at Fed chair Yellen by attacking “macroprudential supervision.” Macroprudential is a favorite term of Yellen's:
There are some who believe that “macroprudential supervision” will safeguard us from financial instability. I am more skeptical....
[O]ne has to consider the root cause of the “Everything Boom.” I believe the root cause is the hyper-accommodative monetary policy of the Federal Reserve and other central banks.
Fisher then warned about the developing price inflation that Yellen refuses to acknowledge:
The FOMC has a medium-term inflation target of 2 percent as measured by the personal consumption expenditures (PCE) price index. It is noteworthy that the 12-month consumer price index (CPI), the Cleveland Fed’s median CPI, and the so-called sticky CPI calculated by the Atlanta Fed have all crossed 2 percent, and the Dallas Fed’s Trimmed Mean PCE inflation rate has headline inflation averaging 1.7 percent on a 12-month basis, up from 1.3 percent only a few months ago.[4] PCE inflation is clearly rising toward our 2 percent goal more quickly than the FOMC imagined...

I am willing to tolerate temporarily overshooting the 2 percent level in the case of supply shocks, as long as inflation expectations are firmly anchored. But given that the inflation rate has been accelerating organically, I don’t believe there is room for complacency.
To be sure, in my view we are in much dire straits with regard to price inflation and Fed created speculations in the markets than Fisher acknowledged in his speech, but the takeaway here has to be that he does see the developing crisis. And more importantly, the tone of his speech suggests that few others at the Fed share his concerns.

He is like a kid in a car full of teenagers on the road at 2:00 AM. The designated driver, Yellen, is as drunk as the rest of them, if not more. She has the pedal to the metal and is oblivious to any dangers. She thinks her alcohol dulled mind will be quick enough to handle any problem on the road. He is sitting in the back seat and knows that's not good, and there is a truck heading right at them on the narrow road.

Of course, the real problem is that all of America is riding in the back seat of that car being driven by Yellen.

Robert Wenzel is Editor & Publisher of and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.

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