Fed's Fisher Talks Alibaba, FOMC Meeting, More.. Sep 19, 2014 12:30PM

Dallas Federal Reserve President Richard Fisher spoke with FOX Business Network’s (FBN) Maria Bartiromo about the Alibaba IPO today, saying Executive Chairman Jack Ma "is selling into a market that is very rich; we have helped make it so at the Federal Reserve" and that it is "good timing, I would say, smart guy." Fisher went on to comment about his dissenting at the Federal Reserve meeting this week saying, "I'm not worried about inflation right now” and that “I do think there are some signs of excess in the financial markets." When asked about rate hikes Fisher said, "I personally expect it to occur in the Spring and not in the Summer."

Excerpts from the interview are below:

On Alibaba:

“He is of course selling into a market that is very rich; we have helped make it so at the Federal Reserve. I think my personal view, having been in the business is, of course, you never fight the Fed, but we have been extremely helpful. Remember after that March '09 bottom, we've come up over 2.5 times. So good timing, I would say; smart guy. And the question is, of course, how long is this going to be sustained and the markets will make that decision.”

On when he sees rates rising:

“I personally expect it to occur in the spring and not in the summer as it seems the markets are discounting. But we will see. I think that would be wiser; it depends, as Chairman Yellen said, on the developments in the economy.”

On why he dissented at the Federal Reserve meeting this week:

“Look, contrary to what everybody says, I am not worried about inflation now. In fact, my statement said I was aware of the price stability. What I am concerned about is the fact that employment has improved significantly. We got very good numbers yesterday. This is like duck hunting, you shot ahead of the mallard rather than try to get it from behind, otherwise you can't hit it. And we have to lead on this front. So there is that issue, which is we have improving employment…And the second is I do think that there are some signs of excess in the financial markets… from a market standpoint, you are being deceived. Things getting a little bit rich, particularly -- even though the junk market spread has come off a little bit, we're seeing some GAAP downs and some junk issues. It's driven by ETFs. And when you get individual bids on individual bonds, I have seen some dramatic behavior recently. Now these are lousy companies. That's why they're triple Cs. But they’re begin to see a little fissures. And that concerns me and I don't want to drive this any further. And I think we have to be aware of this and I personally would want to see the date of our first move.”

On raising rates:

“I'm in a slow and gradual school, I think it would be a mistake to wait too long and then raise rates rapidly. So once we start raising rates, when the committee decides to do that, whether it's the spring or the summer or whatever it may be, I think it ought to be in quarterly increments, slow and deliberate and we just have to adjust and feel how the economy comes. If we wait too long and we raise rates steeply, there is no time in history that I am aware of when the Fed has done that it hasn't driven the economy into a recession. And what I worry about is that is the last thing we need…We're leading the world along with the U.K. in terms of our economy. Everyone else is not doing so well. I wouldn't want to get to the point where we act severely and we drive us back into a recession. And that is the history going all the way back, whenever we've raised rates too much after we've overshot the mark on employment.”

On how to unwind the Federal Reserve’s balance sheet:

“Very slowly…And Chair Yellen mentioned this. The plan by the committee now is to just not reinvest after a certain period once we start raising rates. Now that is the point of departure for me, by the way. I thought it was a natural for us once we stopped our purchases, which we said in the statement we will stop in October. That delights me personally, as you know. But it would have been a good time -- I argued at the table -- to begin reducing our reinvestment, it was a natural flow-through, before we announced we were going to raise rates whenever we decide to do that. But I lost that argument at the table and you have to respect the others that are there. I was alone, but I lost the argument.”

On the housing market:

“Well, one of the things that happened is prices came up too fast. If you talk to housing builders, they will tell you this. Prices moved too far too fast. So there's a little bit of sticker shock. Secondly, there is a real problem with qualification, particularly with the younger generation, all these college loans that they have and qualifying to get permission to borrow money to invest in homes. There's a shortage of lots.”

On whether there is shortage of skilled labor:

“One of the things they do not talk about, particularly the publicly traded companies, is a shortage of skilled labor. Now here, where we have a hot real estate market, you literally see armed guards posted around construction projects to keep people from poaching the labor force. It is astonishing. But there is a shortage of skilled labor. Mexicans build homes in America. I don't care if it is Bangor, Maine, or Portland, Oregon, or Dallas, Texas. That is immigration policy. I defy you to find a homebuilder that says mortgage rates are really the issue.”

On the unemployment numbers:

“Yes, the numbers came back very hard and by the way, it is July numbers were readjusted upward. They're pretty attractive. So that's -- but that is something that people look at. If you look at the employment numbers and the claims numbers that came out yesterday, that surprised everybody by being so low, unemployment claims. So there is movement forward. This is good. The Fed should take some credit for it. It would be so much better if our fiscal authorities just get their act together.”

On Scotland’s Independence vote:

“I don't think it's over, by the way. They are get concessions for the government, and now the Welsh are going to ask for the same thing and the Irish will ask for the same thing. So Catalonians will ask for the same things. So this is an interesting little thing, but I'm glad, after 308 years of history, that they held it together. But they're going to get more powers and all power to them for getting it.”

On President of the European Central Bank Mario Draghi:

“I mean, their process is they're just beginning it, the first takedown of those new instruments wasn't that robust. But remember, they're in a different stage of development than we are. Our central bank has been trying new techniques for quite some time. The real problem there, we have one dysfunctional government to deal with; they've got numerous governments that have different fiscal policies. So my sympathy is I think Mario is one of the great central bankers, he certainly knows the business from his Goldman Sachs background to his theoretical background, it's an unusual combination. I hate to comment negatively at all, so I'm just going to wish him well in this process. The backdrop there is from a fiscal standpoint is not very positive. You have disparate governments and of course you have France ,which is uber weak right now with a president that is even lower rated in the polls than ours.”

Yellen press conference concludes Sep 17, 2014 03:28PM

Janet Yellen press conference concludes.

FOMC Cuts Bond Buying to $15B, Keeps 'Considerable Time' Language ; Issues Projections, Sees Fed Funds Rate of 1.375% at the of 2015 Sep 17, 2014 02:13PM

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance. President Plosser objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.

The Fed also Released a Policy Normalization Principles and Plans

During its recent meetings, the Federal Open Market Committee (FOMC) discussed ways to normalize the stance of monetary policy and the Federal Reserve's securities holdings. The discussions were part of prudent planning and do not imply that normalization will necessarily begin soon. The Committee continues to judge that many of the normalization principles that it adopted in June 2011 remain applicable. However, in light of the changes in the System Open Market Account (SOMA) portfolio since 2011 and enhancements in the tools the Committee will have available to implement policy during normalization, the Committee has concluded that some aspects of the eventual normalization process will likely differ from those specified earlier. The Committee also has agreed that it is appropriate at this time to provide additional information regarding its normalization plans. All FOMC participants but one agreed on the following key elements of the approach they intend to implement when it becomes appropriate to begin normalizing the stance of monetary policy:

The Committee will determine the timing and pace of policy normalization--meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve's securities holdings--so as to promote its statutory mandate of maximum employment and price stability.

When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.
During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.

The Committee intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.

The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.

The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.

The Fed also released its economic projections from the September 16-17 FOMC meeting.

Hold on Tight... Fed Day Could Bring a Number of Changes Sep 17, 2014 08:23AM

The FOMC wraps up its 2-day meeting today and is expected to deliver its policy statement at 2PM ET. The meeting and subsequent press conference is considered very important by market watchers as the Fed is expected to make a number of changes which could have widespread ramifications on asset prices.

Economists at Nomura expect to receive another round of FOMC forecasts for the first time since June, which they say will incorporate significant new data. The forecasts should also be extended to 2017, thus giving a better sense of how the participants judge the current balance between actual and potential output.

They also expect the Fed to make changes to its forward guidance. "At a minimum, we expect the FOMC to add language that stresses the “data dependence” of future interest rate decisions," they said. They expect the FOMC will continue to state that the adjustment of interest rates, when it comes, will be “balanced” and that it expects interest rates to converge to normal levels more slowly than employment and inflation. However, "in the light of the sustained improvement in labour market performance, and the inherent complexities in assessing their state, we expect the FOMC to drop its assessment that “lift-off” is still a “considerable time” away."

Nomura said these change reflect the progress of the US recovery. The changes are also easier to make because the current state of financial markets - stable long-term interest rates and resilient financial conditions - gives the FOMC some comfort that it can take another step towards normalizing policy without an outsized impact on the economy.

"Although we expect substantial changes to the FOMC’s forward guidance, we do not think that the FOMC will want to send a signal that a “lift-off” is imminent. In this context, we continue to believe that the most likely timing for the first interest rate hike is June 2015. However, recent developments in US monetary policy have shifted the risk around our call forward."

Investors Could Be Lowballing Risk of FOMC Hawkishness, Says Citi Sep 12, 2014 03:10PM

Citi Bank analyst Steven Englander discussed FOMC policy in a research note to clients. Wednesday’s announcement is expected to be the key event next week, with wide implications.

Englander thinks it is probably at least 40% expected that the language will shift from keeping fed funds near zero for a ‘considerable time’ to more data dependent policy guidance. From an FX standpoint, Englander said USD could correct 0.5%-1% if dovish language is retained. On the other hand, he thinks investors could be lowballing risk of FOMC hawkishness.

“Dropping ‘considerable time’ would be a major hawkish step, even if replaced by a ‘data dependent’ pace of rate hikes and a FOMC view that considerable slack remains in place. It would be seen as opening up room for hiking before mid-2015 and as opening risk of a faster move of policy rates to their equilibrium,” said Englander.

“There is speculation that the FOMC may drop the language indicating ‘significant underutilization of labor resources’, but investors will likely see that as secondary. Were they to drop the ‘considerable time’ language, but keep ‘underutilization’ it would still be hawkish from a FX market perspective, because the operational shift would be the dropping of the time commitment. Keeping ‘considerable time’ and dropping ‘underutilization’ would probably be viewed as somewhat dovish, as the concrete assurance of low rates would outweigh the assessment of utilization,” he continued.

"The other uncertainty is whether and how much the dots and economic forecasts move. This is less discussed than the FOMC language, but may be as important," he added. "It is expected that Fed Chair Yellen will strike a dovish tone at the press conference, even if the Statement and forecasts are viewed as more hawkish. We are skeptical that she can walk back concrete hawkishness (such as removal of ‘considerable time’ or shifting dots) with a qualitative press conference comfort message, but this is debated and she is expected to try."

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