Federal Reserve Bank of Dallas CEO Richard Fisher Interview
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A top US central banker on Monday warned the “feral hogs” of financial markets against trying to force the Federal Reserve to shelve plans to slow its bond buying, as yields on US Treasuries climbed to their highest level since August 2011.

Richard Fisher, president of the Dallas Federal Reserve, said in an interview with the Financial Times that the Fed had anticipated a lively market reaction to last week’s announcement that it was considering bringing an end to its $85bn/month bond purchases.

But Mr Fisher, a member of the rate-setting Federal Open Market Committee, warned that markets should not think the Fed would end up propping up the economy indefinitely, or that it could be pushed to keep buying Treasuries at the same pace and, in so doing, keep inflating asset price bubbles.

The former hedge fund manager likened the market reaction to Fed chairman Ben Bernanke’s signal that the bank could begin reducing its $85bn monthly bond purchases before the end of this year to the 1992 attack led by investor George Soros on the Bank of England. The latter led to the UK crashing out of the European exchange rate mechanism.

“Markets tend to test things,” Mr Fisher told the FT. “We haven’t forgotten what happened to the Bank of England [on Black Wednesday]. I don’t think anyone can break the Fed . . . But I do believe that big money does organise itself somewhat like feral hogs. If they detect a weakness or a bad scent, they’ll go after it.”

Signs that Mr Bernanke’s comments had rattled investors continued to emerge from financial markets on Monday. The 10-year Treasury yield – the global benchmark for borrowing costs – rose to a peak of 2.66 per cent in early New York trading, extending its rapid rise from a low of 2.10 per cent a week ago. The S&P 500 index of leading US stocks fell 1.6 per cent.

Separately, Narayana Kocherlakota, president of the Minneapolis Fed, said on Monday he was not particularly worried about the short-term market reaction to the Fed move. But he said he would be concerned if it continued.

“I think what we’ve seen so far is not a cause for concern but obviously if these higher yields were to harden over a longer period of time that would be restrictive to economic conditions, suppressing demand and thereby suppressing employment”, Mr Kocherlakota said.

Mr Fisher, who is among the more hawkish Fed policy makers, emphasised that all the Fed had announced last week was that it would begin “tapering” when conditions were right and had not even started reducing its purchases.

He said the Fed statement and subsequent press conference were part of a process to prepare markets for the end of central bank support. It “made sense to socialise the idea that quantitative easing is not a one-way street”, he said, and emphasised any such move would be done cautiously.

“I don’t want to go from Wild Turkey to ‘cold turkey’ overnight,” Mr Fisher said.

Mr Fisher made it clear he believed bubbles had developed in a number of financial markets, mentioning emerging markets and real estate investment trusts. He also noted that companies issuing bonds with a triple C rating, which is junk status, could now borrow for less than 7 per cent.

“I think these [market movements] are things that are noteworthy. I was mentioning [them at last week’s meeting]. I wasn’t alone in drawing attention to these factors.”

On the debt markets, he said: “We’ve had a 30-year bond market rally. These things do not go on forever.”

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