This is the most pessimistic quote from this statement:
"It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses."
This is as bad as it gets when talking about inflation/ stock bubbles:
"There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices."
This is merely a sober assessment of quantitative easing.
"Concern about the possibility" is not "we're screwed."
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Meeting of the Federal Advisory Council
and the Board of Governors
Friday, May 17, 2013
http://www.federalreserve.gov/aboutthef ... 130517.pdf
Item 8: Monetary Policy
How would the Council assess the current stance of monetary policy? What do Council members see as the ongoing impact of the Federal Reserve's portfolio? How are the Federal Reserve's securities purchases influencing financial markets?
• Based on economic forecasts, and in light of ongoing economic weakness, continuing fiscal policy restraint, and the recent downturn in inflation, it is likely that current policy accommodation will continue for one to three years. When policy accommodation ends, the Fed’s actions are likely to be linked to improved economic activity, which will serve to cushion fallout. The Fed is expected to communicate its intentions to the markets to help avoid sudden shocks.
• The Fed’s policies have had positive direct and indirect effects on the housing market, consumer sentiment, and the overall U.S. economy. The aggressive rate of asset purchases has helped maintain low short-term and mortgage interest rates and liquidity in the markets. This in turn has increased prices of debt and equity securities, consumer confidence and spending, and confidence in the financial markets. The Fed’s stance on monetary policy has provided support for a slow but measurable economic recovery in critical areas such as the financial and housing markets and consumer finance.
• However, the effectiveness of the policies in producing healthy economic and employment growth is not clear. Uncertainty about fiscal and monetary policy is deterring business investment that would spur growth, and despite policy accommodation, economic growth has remained sluggish and uneven. While some believe monetary policy may not be accommodative enough in light of current government fiscal policy, others believe that constant injections of new reserves have not returned the economy to the vibrant upbeat model it used to be and that current monetary policy is ineffective.
• There are potential risks associated with current policy. The Fed’s securities purchases have reduced mortgage yields and, to a lesser extent, Treasury yields. Current low bond yields are disruptive to management of fixed-income portfolios, retirement funds, consumer savings, and retirement planning. They may encourage unsophisticated investors to take on undue risk to achieve better returns. MBS purchases account for over 70% of gross issuance, causing price distortion and volatility in the MBS market. Fixed-income investors worry that attractive mortgage-backed securities are in very tight supply. Higher premium coupons carry too much exposure to prepayments, potentially led by new government support programs for housing. Many are concerned about the Fed’s significant presence in the market. They have underweighted MBS in favor of corporate, municipal, and emerging-market bonds. There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.
• Further, current policy has created systemic financial risks and potential structural problems for banks. Net interest margins are very compressed, making favorable earnings trends difficult and encouraging banks to take on more risk. The Fed’s aggressive purchases of 15-year and 30-year MBS have depressed yields for the “bread and butter” investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk. Finally, the regressive nature of the artificially compressed savings yields creates pent-up demand within bank deposit portfolios; these deposits may be at risk once yields begin to rise and competitive pressures increase.
• Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses. Given the Fed’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.
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======"Fed's Advisory Council Admits We're Screwed"
