Tags: Fed | Fisher | Margin | Risk

Fed's Fisher: Margin Investors Tread a Risky Path

Wednesday, 12 February 2014 07:10 PM

Federal Reserve Bank of Dallas President Richard Fisher said U.S. banks and stock market investors using debt may be taking excessive risks, prompted partly by the Fed’s record-low interest rates.

Margin debt, or borrowing to finance stock purchases, is “near an all-time high,” Fisher said Wednesday in an interview at the Dallas Fed. “My background tells me that is usually a dangerous predicament. That doesn’t mean the world is coming to an end, but it tells you markets can reverse.”

Fisher, who votes on policy this year, agreed with Fed Chair Janet Yellen’s congressional testimony Tuesday that there are currently no signs of asset price bubbles in the U.S. Still, near-zero interest rates set by the Federal Open Market Committee have increased competition among lenders seeking borrowers with good credit, while making it easier for troubled companies to get loans, he said.

“Everyone is reaching to take advantage of this environment,” Fisher said, who has favored ending bond purchases by the Fed. “I worry about that. I talk about that in the FOMC. That is something I have urged us to watch as an indicator of whether we have poured too much gasoline on the fire.”

The Standard & Poor’s 500 Index was little changed Wednesday after the best four-day rally in a year, while the yield on the 10- year Treasury note rose 0.04 percentage point to 2.76 percent in New York.

Money Borrowed

The amount of money borrowed from brokerages that do business on the New York Stock Exchange to buy shares surged 35 percent last year to a record $444.9 billion as of Dec. 31. Margin debt, as the borrowing is called, has almost doubled from $230.9 billion as of the end of 2009, NYSE data show.

Yellen in her testimony said she recognizes that low rates may help create asset price bubbles. While the Fed’s ability to detect distorted prices is “not perfect,” she said valuation measures don’t suggest asset prices “broadly speaking are in bubble territory.”

Fisher said companies with low credit ratings can sell debt today even after indicating they “will have to be reorganized, or are in bad shape.”

“The junk market is very richly priced,” Fisher said. Leveraged loan activity is “fairly significant,” he said.

“The big banks are crawling all over here” to make loans, and terms are “hyper-competitive,” he said.

Overall Activity

The overall activity “just indicates to me some mistakes can be made by the lender or the investor,” he said. “We have to be mindful of the fact that accidents can happen. We don’t want to be responsible for that from a policy standpoint.”

Fisher said he was pleased by Yellen’s endorsement of scaling back stimulus in “measured steps” and signaling that the bar is high for a change in that plan.

Only a “notable change in the outlook” for the economy would prompt policy makers to slow the pace of tapering, Yellen said in response to a lawmaker’s question Tuesday.

Tapering will continue “unless we see some dramatic sudden reversal” in the economy, Fisher said.

St. Louis Fed President James Bullard said Fed officials will probably be careful about altering the pace of their reductions to bond buying because of a potentially significant impact on markets.

“If we move off our baseline, it’s going to have pretty big repercussions,” Bullard said Wednesday in an interview at Bloomberg’s headquarters in New York. “We’d be cautious in using that — it’s going to have to be a situation where you’re pretty sure things are moving off track.”

Accelerating Growth

Fisher said he’s confident economic growth will accelerate this year. Weak economic data recently is the result of harsh winter weather, he said.

Some business leaders have told Fisher, “‘we are ready to roll,’” he said. “I just sense more confidence.”

Fisher said Wednesday he believes the Fed should consider altering its statement on when it would consider raising the main interest rate. Its current statement that it will probably hold the benchmark rate near zero “well past” a decline in unemployment below 6.5 percent may need to be adjusted after a drop in the jobless rate last month to 6.6 percent, he said.

“I am in favor of exploring this,” Fisher said. “I think we should flesh that out further, but do so in a very deliberate manner.”

Fisher, a former money manager and deputy U.S. trade representative, has been president of the Dallas Fed since 2005. In 2011, he dissented twice against efforts to push down long- term borrowing costs and keep the benchmark interest rate near zero for a prolonged period. He voted in favor of tighter policy five times in 2008. His district includes Texas, northern Louisiana and southern New Mexico.

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Federal Reserve Bank of Dallas President Richard Fisher said U.S. banks and stock market investors using debt may be taking excessive risks, prompted partly by the Fed's record-low interest rates.
Wednesday, 12 February 2014 07:10 PM
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