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Bernanke Said to Minimize Asset-Bubble Concern at Meeting

By Rich Miller
February 22, 2013 10:13 AM EST 334 Comments
Ben S. Bernanke, chairman of the U.S. Federal Reserve. “There’s a lot of disagreement about what role monetary policy plays in creating asset bubbles,” Bernanke said on Jan. 14 at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor.
Photographer: Andrew Harrer/Bloomberg
Ben S. Bernanke, chairman of the U.S. Federal Reserve. “There’s a lot of disagreement about what role monetary policy plays in creating asset bubbles,” Bernanke said on Jan. 14 at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor.

Federal Reserve Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions.

The people, who asked not to be identified because the talks were private, said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee. Fed spokeswoman Michelle Smith declined to comment.

The Fed chairman brushed off the risks of asset bubbles in response to a presentation on the subject from the group, one person said. Among the concerns raised, according to this person, were rising farmland prices and the growth of mortgage real estate investment trusts. Falling yields on speculative- grade bonds also were mentioned as a potential concern, two people said.

Stocks climbed on better-than-anticipated corporate earnings, with the Standard & Poor’s 500 Index rising 0.4 percent to 1,508.24 at 10:07 a.m. in New York. The gauge fell 1.9 percent in the previous two days on speculation that the Fed may slow the pace of its purchases of Treasury debt and mortgage-backed securities, in part because of concerns about asset bubbles.

Speculation about scaled-back asset purchases by the Fed was fanned by the Feb. 20 release of minutes of the central bank’s last policy making meeting in January.

Fed Concerns

Many participants at the Jan. 29-30 Federal Open Market Committee meeting “expressed some concerns about potential costs and risks arising from further asset purchases,” with some noting that added buying “could foster market behavior that could undermine financial stability,” according to the minutes.

The 15-member Treasury Advisory Borrowing Committee is made up of representatives of companies including JPMorgan Chase & Co., Goldman Sachs Group Inc., Pacific Investment Management Co., and Bank of America Corp.

The committee advises the Treasury Department on how to raise money to finance the government. The panel met Treasury officials in Washington on Feb. 5 ahead of the government’s quarterly debt refunding. While in the nation’s capital, members of the group also met Bernanke, the three people familiar with the gathering said.

Bond Purchases

The Fed at its January meeting decided to continue buying $45 billion a month of Treasuries and $40 billion in mortgage debt without setting a limit on the duration or total size of the purchases. Policy makers also affirmed their pledge to keep the target interest rate near zero “at least as long” as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.

“There’s a lot of disagreement about what role monetary policy plays in creating asset bubbles,” Bernanke said on Jan. 14 at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor. “It is not a settled issue.

“Our attitude is that we need to be open-minded about it and to pay close attention to what’s happening,” he added. “And to the extent that we can identify problems, you know we need to address that.”

The “first line of defense” if bubbles emerge “needs to be regulatory and supervisory” actions rather than changes in monetary policy, according to Bernanke.

George’s Dissent

Some Fed policy makers already are concerned. Esther George, president of the Federal Reserve Bank of Kansas City, voted against continuing asset purchases at the central bank’s January meeting out of concern about “the risks of future economic and financial imbalances,” according to the minutes.

Prices “of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels,” George said in a speech Jan. 10.

Farmland values in the Midwest jumped 16 percent last year, the third-largest annual gain since the late 1970s, the Federal Reserve Bank of Chicago said in a Feb. 14 report. Values in Iowa climbed 20 percent, the most among the five Midwest states.

Fed Governor Jeremy Stein said on Feb. 7 that some credit markets, such as corporate debt, are showing signs of potentially excessive risk-taking, while not posing a threat to financial stability.

“We are seeing a fairly significant pattern of reaching- for-yield behavior emerging in corporate credit,” Stein said in a speech in St. Louis.

Speculative Grade

Stein, who voted in favor of continued asset purchases at the Fed’s January meeting, singled out the speculative grade bond market as an example of potential over-heating.

Investors have piled into speculative-grade bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, driving yields down. The extra yield investors demand to hold the securities rather than Treasuries has fallen to 4.92 percentage points as of Feb. 20 from the record high of 21.82 percentage points in December 2008, according to the Bank of America Merrill Lynch U.S. High Yield Index.

In his Feb. 7 speech, Stein also discussed mortgage real estate investment trusts, which he said had “grown rapidly” by using low-cost, short-term financing to fund purchases of longer-term debt.

Mortgage REITs’ holdings of government-backed home-loan securities rose to about $350 billion last year, from about $90 billion in 2008, according to Nomura Securities International estimates last month.

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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