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Fisher’s uber-accommodation and policy normalization solutions

Phalguni Soni

Fisher on the rate rise, financial excess, and political pliancy (Part 7 of 8)

(Continued from Part 6)

Dallas Fed’s Richard Fisher speaks on monetary policy normalization

“Many financial pundits protest that weaning the markets of uber-accommodation. However, gradually, risks wreaking havoc, so dependent on central bank largess have the markets become. As a former market operator, I’m well aware of this risk,” said Dallas Fed Chief, Richard Fisher speaking at the University of Southern California on Wednesday, July 16. In his speech titled “Monetary Policy and the Maginot Line,” he discussed measures to bring monetary policy back on track from the unprecedented stimulus levels seen in the past few years.

Fisher outlines steps to monetary normalize policy

Although the Fed is on course to complete tapering asset purchases this October, this step may not tighten monetary policy enough in the light of economic improvements. According to Fisher:

  • After tapering is complete, the Fed must gradually begin curtailing reinvesting the proceeds from maturing Treasuries and agency-backed securities. He believes that this step won’t affect the housing market despite the small rise in mortgage rates. Improvements in the labor market would increase demand for housing, offsetting any negative repercussions.
  • The above step would lay the ground and prepare markets for the increase in the Fed funds rate in gradual increments. Fisher believes the increase would occur “early next year or sooner depending on the pace of economic improvement.” This would begin the process of monetary policy normalization.

Investor impact

Market participants closely watch the Fed’s actions and the views of Fed officials and policymakers. The monetary policy decisions at Federal Open Market Committee (or FOMC) meetings have bearing on both fixed income and stock (IWD) markets.

Fixed income markets, specifically long-term Treasuries (TLT) and mortgage-backed securities (MBB), would be particularly sensitive should the Fed decide to curtail reinvestment of maturing securities. Monetary tightening would also affect real estate investment trusts (or REITs) which typically rely on leverage, like Annaly (NLY) and American Capital Agency (AGNC).

In the next section, we’ll discuss Mr. Fisher’s views on why the Fed must resist political considerations. Please continue reading the next section in this series.

Continue to Part 8

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