Statements by both dovish and hawkish Fed Presidents calling for an immediate taper shocked stock markets Monday. Dallas Fed President Richard Fisher, in answer to when he thought the Fed should start tapering the $85 billion a month purchases of bonds and mortgage-backed securities, said "I think we should begin now." Fisher will be a voting member of the Federal Reserve Open-Market Committee (FOMC) in 2014.
Fisher said that the cost of continued QE "far exceeds" the benefits. He warns that the "excess liquidity sloshing about in the system" is the reason for the bull market in stocks, as investors buy because of low interest rates instead of fundamentals. Saying that "bankers are awash in money," he maintains that the open-ended quantitative easing is "placing us at risk of becoming submerged in financial shenanigans."
He called for the Fed to announce a beginning of the reduction in bond purchases at next week's FOMC meeting, accompanied by a clearly articulated plan that will eventually bring them to an end, while maintaining base interest rates near zero.
When asked his opinion of a recent Fed policy paper that called for the Fed deliberately trying to increase inflation to 1.5%, he replied that "the idea of ramping up inflation expectations from their current tame levels strikes me as short-sighted and even reckless." Fisher said that the long-term inflation dangers that already exist due to the Fed's easy money policies "will surely test our capacity to manage policy going forward." He noted that there are already housing bubbles in some regions of the country, fueled by artificially low interest rates.
The stock market was further shocked when QE dove James Bullard, President of the St. Louis Fed, also told his audience that the recent better-than-expected jobs data increased the possibility of a taper at next week's meeting. He opined that a small taper in December would get markets used to the idea, and the Fed could decide in the first half of 2014 whether to reverse the taper or extend it. Bullard is currently a voting member of the FOMC, and will help decide if tapering starts next week.
Bullard said that he worries over low inflation rates, and that there is no clear reason while the Fed's bond buying hasn't boosted the inflation rate (some analysts point to the fact that the banks receiving these funds are not using them to make loans, so they do not reach the wider economy.) Taking the opposite view from Fisher, he wants the Fed to keep benchmark rates near zero until inflation reaches 1.5%, believing that the Fed can put on the brakes to keep it from overshooting the 2.5% mark.
A third Fed President, Jeffrey Lacker of the Richmond Fed, also spoke on Monday. A noted opponent of quantitative easing, Lacker said that the Fed's bond buying can do little to boost the economy on its own, and that the growing Fed balance sheet, at nearly $4 trillion in bonds and mortgage-backed securities, will be difficult at best to unload. He expects short-term inflation to increase back towards the Fed's 2% target. He also commented that the uncertainty over a federal budget is damaging the economy, as companies refuse to hire employees or expand.
2013 Nobel Prize-winning economist Robert Shiller agrees with Fisher on the housing bubble, and says that the stock market is also in a QE-powered bubble. When asked in an interview which area of the global economy is most overheated, he replied "I am most worried about the U.S. stock market... Our economy is still weak and vulnerable." He pointed out that tech and financial stocks as the most over-valued, and in bubble territory. Shiller is famous for not only predicting the dot com stock market bubble and bust, but also the U.S. housing crash and sub-prime lending crisis.
Former Director of the Office of Management and Budget, David Stockman, also warns that Fed "money printing" has built bubbles in the stock market and in housing. and not just in the United States. He notes that stock markets are hitting new highs and are up drastically from last year, but earnings are mostly unchanged. He has referred to the U.S. stock market as "the mother of all bubbles," claiming that no one is in the market except "day traders and robots."