The costs of QE3 will exceed the program's benefits, Federal Reserve Bank of Dallas President and CEO Richard W. Fisher said Monday.
"Well before last week's [Federal Open Market Committee] meeting, it seemed to me that QE3's effectiveness had waned while its current and potential future costs were mounting," Fisher said at a Shadow Open Market Committee meeting in New York City. "I was thus an enthusiastic supporter of killing the program."
And while he would prefer "we had never had QE3 in the first place," he said, "[t]o this day, I feel that the costs of accumulating another $1.7 trillion of Treasuries and MBS will be shown to exceed the benefits."
Fisher said he is concerned about the liquidity in the system, since "there is a lot of inflationary tinder available should the Fed mismanage its exit from the hyper-accommodative policy we have pursued and augmented with QE3."
Speaking of the lags from monetary policy moves until they affect the markets, Fisher said, "That characterization applies, in spades, to the unorthodox policy we have pursued at the zero bound, in terms of achieving full employment and hitting our 2 percent inflation target."
Investment-grade companies are stronger, but there is also "what I consider to be a manifestation of an indiscriminate reach for yield, a revival of covenant-free lending, and an explosion of collateralized loan obligations (CLOs), pathologies that have proved harbingers of eventual financial turbulence," Fisher said.
Subpar credits' yields and their spreads to investment-grades have been affected by QE3, he said, "Some 40 percent of newly issued CCC credits have negative cash flows. And yet 'junk' bonds have been trading at or near record historic low yields both in absolute terms and as measured by spreads over investment-grade credits. I worry about this as a risk that has been propagated by QE3, though I do not believe it is the Fed's job to rescue reckless investors from the errors of their ways."
The Fed, Fisher said, shouldn't "directly concern itself with fluctuations in financial-asset prices. If the economy is strong, the securities markets will be propelled by that strength." A strong economy can withstand corrections, Fisher asserted.
As such, Fisher said, "as we approached our deliberations at last week's FOMC, I saw no reason for the Fed to react to the heightened volatility that occurred in mid-October and strongly advised my colleagues that we should be wary of any action we might take at the FOMC that would lead investors to assume there is a 'Yellen Put' hidden in our pocket. For this would only encourage continued indiscriminate investing."
Fisher said the economy is strengthening, and while the 5.9% unemployment rate is still "somewhat above" what is considered the "natural" rate of unemployment, the "gap between actual and 'natural' unemployment has been rapidly shrinking and is now less than 1 percentage point."
Responding to those who criticize the value of the unemployment rate as an indicator of labor market slack based on "subdued wage growth, Fisher reminded that "wage growth responds to the unemployment rate with a lag."
Also, he said, "wage growth becomes increasingly sensitive to the unemployment rate as the unemployment rate reaches lower and lower levels."
Realizing the lag and the sensitivity, Fisher noted, "there's been nothing at all unusual about the behavior of wage growth over the period since the national unemployment rate peaked nearly five years ago."
Fisher was "pleased" the FOMC dropped the word "significant" from its description of labor market slack and that the possibility of rates increasing sooner than expected was raised. "To me, this neutered the adjective 'considerable' in stating the time frame under which we might act. This is why this particular hawk voted 'yes' in support of the
But, it is up to Congress and the president to "provide tax, spending and regulatory incentives for job creators to use the cheap and abundant capital the FOMC and other creditors have made available," and if they fail to act, Fisher said, the Fed should refrain from stoking the economy further.
