Federal Reserve Bank of Dallas President Richard Fisher, one of the most vocal critics of quantitative easing by the central bank, called for a reduction in the $85 billion in monthly asset purchases while saying he sees an end to a three-decade bull market in bonds.
“This is the end of a 30-year rally” in bonds, Fisher said yesterday to reporters after a speech in Toronto. “It would be prudent to dial back the rate of purchases we are making in mortgage-backed securities” now that “the housing market is in a good state, construction has started again, housing prices are appreciating significantly.”
Treasury yields have jumped in the past month as some Fed officials have said the central bank could slow its asset purchases. Chairman Ben S. Bernanke said on May 22 that the Fed could consider reducing its monthly bond purchases within “the next few meetings” if officials see signs of sustained improvement in the labor market.
“We’ve had a 30-year bull bond market,” with “the lowest rates in the history of the United States right now,” said Fisher, who doesn’t vote on monetary policy this year. “At some point secular markets change.”
The yield on 10-year Treasury notes rose 3 basis points yesterday, or 0.03 percentage point, to 2.15%, from 1.63% on May 2.
“The one thing the market has begun to discount is that this will not go on forever,” Fisher said, noting that the Fed’s stimulus has helped flatten the yield curve. “I’m not surprised to see a back-up in yields” and “when you’re being compensated for risk at such a low rate at nominal terms, forget about spreads, as an investor I would be cautious.”
Fisher opposed the beginning of the current round of bond-buying in September as well as the expansion of the program to Treasuries in December.
Kansas City Fed President Esther George, who has dissented against record stimulus at every policy meeting this year, also urged the central bank to begin slowing the stimulus as growth quickens and low interest rates encourage investors to take on more risk.
“Waiting too long to acknowledge the economy’s progress and prepare markets for more-normal policy settings carries no less risk than tightening too soon,” she said yesterday in the text of a speech in Santa Fe, New Mexico. She was unable to speak because of illness.
The Fed will probably trim its monthly asset purchases by almost a third in September if the labor market continues to strengthen, according to Joseph LaVorgna, Deutsche Bank AG’s chief U.S. economist.
The first reduction will be $25 billion, consisting of $10 billion fewer mortgages and $15 billion of Treasuries. This will bring monthly purchases down to $60 billion from the current level of $85 billion, LaVorgna wrote yesterday in note to clients.