By Robert Lenzner, Forbes Staff In New York this week, Eric Rosengren, President of the Federal Reserve Bank of Boston, assured several audience members surrounding him after a speech on financial market regulation that he saw “no bubbles of any kind, even in real estate,” where he reckoned residential home prices were still selling at a discount to the peak values in 2006. He added that residential homes in Boston and New York were selling at a 10% to 20% discount from the records set before the great recession while prices in Miami, Phoenix and California were at even further below the peak. Rosengren is a member of the Fed’s Open Market Committee that rules over the application of monetary policy and especially the level of interest rates. He made it clear he would support the Fed’s record low interest rates until there is more “traction” in the economic recovery nationally. This comforting opinion has also been articulated in recent weeks by both Ben Bernanke, the Federal Reserve Board Chairman, other regional central bank presidents and even a leading policy maker at the Bank of England. On March 20, 2013, for instance, Chairman Bernanke exclaimed clearly that “in the stock market, you know, we don’t see at this point anything that’s out of line with historical patterns. In particular… while the Dow may be hitting a high, it’s in nominal terms, not in real terms. And if you adjust for inflation and for the growth of the economy… we’re still some distance from the high.” He also was of the opinion that “the relationship between stock prices and earnings is not particularly unusual at this point.” As well, Chicago Federal Reserve President Charles Evans said recently; ” We’ve looked at a lot of things and there’s nothing in the horizon that causes me great angst. Minneapolis Federal Reserve President Narayana added that bubbles are “something we have to keep monitoring”, but ” I don’t see” any risk at present. During a recent panel discussion at the Boston Fed a Bank of England official, David Miles, weighed in with his level of comfort by saying ” I don’t think we’re in that kind of territory that obviously makes these asset prices unsustainable and at a bubble level.”
Tag Archives: Boston Fed
There Could Still Be Runs on the Money Market Funds
By Robert Lenzner, Forbes Staff The President of the Federal Reserve Bank of Boston, Erick Rosengren, suggested this week that there could still be runs on money market mutual funds, as took place at the peak of the 2008 financial crisis, since these funds have “no capital” and invest in uninsured short term securities of banks and other financial service firms. While debate over potential regulatory solutions for money market funds continues on, the Boston Fed chief, emphasized that the safety of the money market mutual funds are a “significant unresolved issue.” As of April 13 there was $903.56 billion in retail money market funds sponsored by Fidelity, T. Rowe Price, Dreyfus, Invesco and others, The total amount of all kinds of money market funds, some owned by institutional investors, was $2.6 trillion. The average weekly yield was a record low of only 0.02%. He also singled out the issue of capital for the broker-dealer fraternity, where he raised the problem of “virtually no change for broker-dealers since the collapse of Lehman Brothers in September, 2008 and the shotgun marriage of Merrill Lynch into BankAmerica. The solution Rosengren recommended was that the “larger(these investment firms) get the higher the capital ratio”: should be imposed on them. The Boston Fed chief executive, speaking at Bard College’s Levy Institute conference on the economy and financial markets, seemed to be suggesting that the cause for this vacuum in policy is that “Regulatory bodies haven’t evolved as much as the financial markets.” In other words, 5 years after the 2008 meltdown we still have a major challenge in trying to make the global financial system secure against runs and speculative bubbles. There is still further to go in the structural reorganization of the danger from derivatives, but he believes clearing derivatives contracts on exchanges and the decline in bilateral transactions has reduced an element of risk. Nevertheless, Rosengren made crystal clear in conversation after his talk that he “sees no bubbles anywhere, not even in real estate where prices are still below their 2006 peak.” He believes prices of residential real estate in Boston and New York are still 15-20% under their peak– and prices in Miami, Phoenix, Las Vegas, California– are still priced at a steeper discount to the peak in 2006. As for the economy in general, Rosengren sees “traction” picking up momentum, in which case he would support the “prudent” position of gradually reducing the QE stimulus program. However, he is troubled by the fact that monetary policy(quantitative easing and record low interest rates) are in conflict with fiscal policy, the restraint of sequester and reduction of federal, state and local government spending, ie “the Obama cuts.”