Fisher Says Fed Must Ward Off ‘Ghost’ of Irrational Exuberance

Federal Reserve Bank of Dallas President Richard Fisher, who has supported scaling back of the Fed’s bond buying, cautioned that there are signs in financial markets indicating the program may be emboldening investors to take excessive risks.

“We must monitor these indicators very carefully so as to ensure that the ghost of ‘irrational exuberance’ does not haunt us again,” Fisher said in remarks prepared for delivery today in Mexico City. He was referring to a phrase former Fed Chairman Alan Greenspan used in December 1996 as U.S. stocks neared their eighth straight quarterly advance.

“Margin debt is pushing up against all-time records. And, in the bond market, narrow spreads between corporate and Treasury debt reflect lower-risk premia on top of already abnormally low nominal yields,” Fisher said.

Fisher votes this year as part of the Federal Open Market Committee, which will meet on March 18-19 during its first meeting led by Chair Janet Yellen since she succeeded Ben S. Bernanke last month. The policy group is trying to determine whether recent economic weakness stems from weather or fundamental obstacles to growth.

“With its massive asset purchases, the Fed is distorting financial markets and creating incentives for managers and market players to take increasing risk, some of which may result in tears,” Fisher said. “I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis.”

Record Stocks

U.S. stocks today were little changed after the benchmark Standard & Poor’s 500 Index rose to a record yesterday, and has almost tripled since March 2009. Today the S&P 500 closed at 1,873.81.

“There are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive,” Fisher said.

The Fed, in its Beige Book review of regional conditions, said today the economy in most districts grew last month even as harsh winter weather impeded hiring, disrupted supply chains, and kept customers away from stores and auto dealerships.

Fisher, who grew up in Mexico City and speaks Spanish, said there are limits to the effectiveness of monetary policy, and uncertainty over fiscal and regulatory policy has held back business investment.

A former money manager and deputy U.S. trade representative, Fisher 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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