Fed's Fisher: "I Have Never Seen Such Ebullient Credit Markets"

Thursday, 04 Sep 2014 08:51 PM


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Federal Reserve Bank of Dallas President Richard Fisher said a decline in interest rates on riskier credit suggests U.S. markets have become overheated.

“The dashboard shows that we have overshot the mark,” Fisher said in a speech in Dallas on Thursday. “I have been involved with the credit markets since 1975. I have never seen such ebullient credit markets.”

Demand is rising for the debt as buyers purchase higher-yielding bonds, banking on the Fed to keep suppressing interest-rate targets that it has held near zero since 2008. Fed officials are on pace to conclude a two-year asset-purchase program next month as a faster-than-forecast decline in the unemployment rate creates pressure to move up the timing of the first increase in the main interest rate since 2006.

“Interest rates on the lowest-quality credits — on junk — are historically low, as are the spreads they are priced at above the current historically low nominal rates for investment- grade credits,” Fisher said in remarks prepared for delivery to the U.S.-India Chamber of Commerce.

“Cheap and abundant monetary fuel” has allowed companies to improve their finances and become “rich and muscular,” Fisher said.

An increase in the Institute for Supply Management’s non-manufacturing index, which climbed to the highest since August 2005, as well as a climb in its manufacturing index, “underscore the healing that is taking place in the U.S. economy,” he said.

Labor Dynamics

With the U.S. unemployment rate falling to 6.2 percent, “the dynamics of the labor market are improving,” Fisher said.

While inflation measured by the Fed’s preferred gauge, the personal consumption expenditure index, has eased in July from the pace of earlier in the year, Fisher said he was skeptical that the U.S. is experiencing a less-than-acceptable inflation rate.

Looking at the “underlying price stability” by removing the more volatile price moves, “we saw some of the fastest rates of increases in a while for the largest, least-volatile components of core services, such as rent and purchased meals,” he said. “So the jury is out as to whether we have seen a reversal in the recent upward ascent of prices toward our 2 percent target.”

The Dallas Fed leader used the bulk of his speech to discuss the Texas economy, which has led job creation since 1990 because it is the “most pro-business state in the United States.”

Fisher, a former money manager and deputy U.S. trade representative, has led the Dallas Fed since 2005. He dissented twice in 2011 against efforts to push down long-term borrowing costs and keep the benchmark interest rate near zero for a prolonged period.

The Dallas Fed chief voted in favor of tighter policy five times in 2008. His district includes Texas, northern Louisiana and southern New Mexico.

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