A Fed official confesses: the Fed front-loaded the stock rally, and a correction is coming
For six years the existence of a 'Fed put' was denied by the Fed and by most of Wall Street. Then a man who had sat at the table described it, cheerfully, on television.
On 5 January 2016, with the stock market falling for the fourth day of the new year, CNBC interviewed Richard Fisher, who had retired the previous spring after ten years as president of the Federal Reserve Bank of Dallas and a voting member of the committee that sets American monetary policy. What he said was, for a Fed insider, unusually plain, and this page recorded it at the time because such things are rarely said in public and more rarely by someone who was in the room.
What he said
“What the Fed did, and I was part of that group, is we front-loaded a tremendous market rally, starting in 2009.” He called it “the reverse Wimpy factor: give me two hamburgers today for one tomorrow.” The purpose, he said, was explicit: “We front-loaded at the Federal Reserve an enormous rally in order to accomplish a wealth effect.” Asked about the fall in every index since the Fed’s first rate rise in December, he said he was not surprised, that there would be “a great digestive period” that might continue, and that he would not blame China: “We’re always looking for excuses.” Valuations were “very richly priced here, so I could see significant downside.” He had warned his colleagues, he said, not to “go wobbly” if the market corrected by 10 or 20 per cent. And, elsewhere in the same week: “The Federal Reserve is a giant weapon that has no ammunition left.” What drove the markets, he said, was “the Fed, the Fed, the Fed”, the ECB and the Bank of Japan, “all quantitatively driven by central bank activity. That’s not the way markets should be working.”
Why it mattered
The mechanism Fisher described was the one set out in the guide to quantitative easing on this site four years earlier: the Fed tells the banks what it will buy, the banks buy it from the Treasury and sell it to the Fed at a profit, and the profit and the reserves go into stocks. What had been an inference from the flows was now a description from a participant. Three things the Fed and most of Wall Street had denied were conceded in a single interview: that the Fed intended the stock market to rise, that it acted to make it rise, and that the result was a bubble that would have to deflate once the support was withdrawn.
The wealth effect is the theory that people who see their portfolios rise spend more, and that the spending becomes a recovery. Fisher’s account was of a policy that got the first half and not the second. The market rose; the economy limped; and the Fed found, in December 2015, that it had raised rates a quarter of a point into a market that had been priced on the assumption it never would.
The question left open
Whether Fisher was covering himself, having dissented on the third round of easing, or being candid because he no longer had a vote, was asked here and left open. It does not change the content. A member of the committee had said the committee juiced the market on purpose, and that the market was now, in his phrase, in a digestive period with significant downside. The correction he described was under way as he spoke.
Later note. The S&P 500 fell about 13 per cent from its December 2015 level to a low on 11 February 2016, then recovered on a pause in Fed tightening and a rebound in oil, and ended the year at a record. The Fed did not raise rates again until December 2016. Fisher’s “no ammunition left” proved wrong in the narrow sense, since the Fed found more in 2020, and right in the sense he meant: each round has needed to be larger than the last.