So now we know why FOMC members Fischer and Plosser voted against Bernanke’s “on hold till ’13″ policy.
From Bloomberg:
Philadelphia Fed President Charles Plosser said in an interview yesterday that taking action after stocks tumbled “signaled that we are in the business of supporting the stock market.” Richard Fisher, the Dallas Fed chief, said in a speech that the Fed “should never enact such asymmetric policies to protect stock market traders and investors.” Both also said the policy won’t help spur growth.
They wanted to wait more evidence on the performance of the US economy.
“It was inappropriate policy at an inappropriate time,” Plosser said yesterday in a radio interview in New York on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. Policy makers will probably need to raise rates before 2013 and should have waited to see how the economy performed, he said.
We shouldn’t be surprised any of this. The Fed chairman has talked of higher equity prices as a marker of success for its QE programmes.
Still, it’s somewhat worrying to think that Fed policy is now enacting policy based on the swings of the stock market.
Talk about moral hazard.
In fact, Fisher did.
Given the extent of the drop in the stock market leading up to and following Standard & Poor’s downgrade of U.S. debt, combined with the FOMC’s commitment to hold short-term rates near zero until mid-year 2013, some cynical observers might interpret such a policy action as a “Bernanke put.” My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors. I believe my FOMC colleagues share this view.
He also said this on the unwillingness of banks to lend.
I have posited both within the FOMC and publicly for some time that there is abundant liquidity available to finance economic expansion and job creation in America. The banking system is awash with liquidity. It is a rare day when the discount windows―the lending facilities of the 12 Federal Reserve banks―experience significant activity. Domestic banks are flush; they have on deposit at the 12 Federal Reserve banks some $1.6 trillion in excess reserves, earning a mere 25 basis points―a quarter of 1 percent per annum―rather than earning significantly higher interest rates from making loans to operating businesses. These excess bank reserves are waiting on the sidelines to be lent to businesses. Nondepository financial firms—private equity funds and the like―have substantial amounts of investable cash at their disposal. U.S. corporations are sitting on an abundance of cash―some estimate excess working capital on publicly traded corporations’ books exceeds $1 trillion―well above their working capital needs.
My concern is with the transmission mechanism for activating the use of the liquidity we have created, which remains on the sidelines of the economy. I posit that nonmonetary factors, not monetary policy, are retarding the willingness and ability of job creators to put to work the liquidity that we have provided.
All of which is very interesting in light of the debate we have been having on FT Alphaville about QE – the poison or the cure. Moreover, we can posit this debate is happening at FOMC.
Still, it’s possible to have a little sympathy with Bernanke, reckons RBS strategist John Briggs.
Whether they should or should not react to equities in such a manner I leave to you. One side of the argument is that with housing languishing, the asset side of household balance sheets cannot handle another large drop in equity prices – it would further crush consumer spending and send us into a double dip. And with equities being one ingredient into the “financial conditions” recipe, lower equities = tighter financial conditions and it is not inappropriate to counter balance that with monetary policy.
On the other side of the argument is the fact that the equity market is not the economy, and an institution that professed to not target asset prices for the last fifteen years should not base monetary policy based on stock prices now. Also, as Fisher blatantly pointed out, the Fed risks perpetuating the belief that there is a “Bernanke Put” and thus all the moral hazard issues that will entail.
In other words, if Bernanke believes equities are a key part of spending and household wealth then that’s all that matters.
Perhaps we’ll discover what’s really on his mind at the Jackson Hole economic symposium next week.
Fear of the Fed moving closer to balance sheet measures will keep a floor under the Treasury market into next week. Already we have seen the inability of yields to move higher even when equities are rallying. I expect more of this into next Friday, because while I think it is too early after the moves on August 9th to enact Operation Twist, the market will be afraid of further policy hint at Bernanke’s Jackson Hole speech – and that’s what matters.
Related link:
Banks: QE3 is coming – FT Alphaville