Richard Fisher on monetary policy: Where to from here? (Part 3 of 9)
The Dallas Fed’s Richard Fisher at the Asia Society
Fisher spoke at the Asia Society in Hong Kong on Friday, April 4, about “forward guidance” in monetary policy, which he described as “the subject du jour of central bankers.” Forward guidance has recently become a focus of discussion in the U.S. after the Fed’s March FOMC meeting, when the Fed decided to go with “qualitative” rather than “quantitative” guidance regarding its future monetary policy statements. During his address, Fisher also spoke about the fallout from quantitative easing (or QE), both favorable and unfavorable.
On the fallout from QE: Favorable outcomes
Large-scale asset purchases of longer-term Treasury (TLT) securities (at a level of $45 billion per month before the taper was announced on December 18, 2013) have driven down nominal yields across the credit spectrum to the lowest levels seen in half a century. This has also increased bond prices, as yields and prices share an inverse relationship. For example, the Market Vectors-Long Municipal Index ETF (MLN), which tracks the performance of the Barclays Capital AMT-Free Long Continuous Municipal Index, has provided total returns of ~39% over the past five years (as of April 4, 2014). The PowerShares Insured National Municipal Bond Portfolio (PZA), which tracks the performance of the BofA Merrill Lynch National Insured Long-Term Core Plus Municipal Securities Index, has returned ~37% over the same period.
Companies have restructured their balance sheets through financing available at historically low rates. The increased liquidity has helped publicly listed companies in boosting dividends and funded share buybacks, which has increased returns to shareholders. This has caused a bull run in the stock market, bolstering index prices to three times the lows we saw in March 2009.
Companies have also been able to discount future cash flows at the historically low hurdle rates. Lowering hurdle rates would imply lower required rates of return on proposed investments and therefore facilitate capital formation and job creation.
Large-scale asset purchases of mortgage-backed securities (at a level of $40 billion per month before the taper was announced on December 18, 2013) have allowed the Fed to drive down mortgage rates and help rekindle the mortgage market (MBB). As of March 14, the U.S. Fed’s par holdings of fixed-rate MBS exceeded 30% of the outstanding stock of those securities.
The boom in the housing market has also benefited home construction companies like Lennar (LEN) and Toll Brothers (TOL). The iShares U.S. Home Construction ETF (ITB) and the State Street SPDR Homebuilders ETF (XHB) are two ETFs investing in the U.S. home construction sector. Five-year total returns for ITB and XHB are estimated at 164.35% and 195.38%, respectively (as of April 4, 2014).
To find out what Richard Fisher had to say about some of the unfavorable impacts of QE and the “irrational exuberance” in financial markets, please read on to Part 4 of this series.
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