Bond rates ‘lowest in 800 years’, says former Fed member Richard Fisher

Leading banker Richard Fisher helped steer the US through the GFC but has never seen anything like this fall in Treasury rates.

Richard Fisher at Barclays offices in Sydney on Monday. Picture: John Feder.

Former Federal Reserve board member Richard Fisher helped steer the US economy through the global financial crisis. But in Sydney on Monday he declared he had never seen anything like the current fall in US Treasury rates.

Mr Fisher said the Federal Reserve board had “lost control of the yield curve” as money flowed into the US in the wake of concerns over the impact of the coronavirus and the slowing outlook for other economies in Asia and Europe, including an “implosion of demand in China”.

“When people panic, the money flows into US dollars,” he said, adding that the US economy was “the best-looking horse in the glue factory”.

Mr Fisher, who was chief executive of the Federal Reserve Bank of Dallas from 2005 to 2015 and a member of the Fed’s open market committee, said the US 10-year Treasury bond rate of 50 basis points was now the lowest ever for a key world currency bond.

“The Bank of England has said that the key marker bond rate in the world is 10-year US Treasuries,” he said.

“And it says these are the lowest rates in more than 800 years when Venice and Genoa ruled the world and they issued the first five-year trading paper.

“With 10-year US bonds at 50 basis points — I never thought I would see this.”

Mr Fisher, based in Dallas and now a senior adviser to Barclays Bank and a director of PepsiCo, is visiting clients of Barclays in ­Australia.

His former roles have included deputy US trade representative from 1997 to 2001 and vice-chairman of Kissinger McLarty Associates, a strategic advisory firm headed by former US secretary of state Henry Kissinger and former White House chief of staff Mack McLarty.

Mr Fisher said the coronavirus crisis was “clearly a black swan event … (but) I call it a red swan event because it has come out of China.”

Referring to why money tended to flow to the US in times of ­crisis, he said: “Somehow, within the complex of the US, we always find places which can come up with something new or be attractive to investors.”

Mr Fisher said the key to the economic impact of the current crisis would be the effect it had on US consumers.

He said consumer spending made up 70 per cent of US economic growth.

“The concern now is if people worry about going to conferences or gatherings or meeting in large groups or going to restaurants — how much will consumers pull back?”

He said low interest rates and falling sharemarkets made things difficult for investors. “It is at the crossroads for us right now,” he said. “We are in a better space than anyone else, but it all depends on what the US consumer does.

“This has shaken confidence. We have been hoarding toilet paper in the US too.”

Mr Fisher said his alma mater, Stanford Business School, had just cancelled plans for its business school reunions that had been scheduled for April.

He said chief executives in the US were now looking at their cashflows and were worried about whether local banks would be continuing to operate and be able to lend money.

“Most companies are thinking about their cash pipelines now and what would happen if something goes wrong,” he said.

“What is going to happen to their bankers? Are they all going to go home? What will be the availability of access to markets for the underwriters?

“Will it have an impact on the ability for regional banks to lend money to small business? This is the kind of chain reaction concern you are getting.”

Mr Fisher said the big fall in oil prices was a result of a sharp cut in global demand for energy.

“The whole commodity sector has been negative for the past three weeks, whether it is tin or wheat or oil or gas.

“What this suggests is that there has been a weakening of ­demand (for oil) of substantial ­proportions.

“We have had a massive expansion of supply (of energy) thanks to the US. The fact that the prices of all commodities including oil and gas (have fallen) would tell you there is a weakening of demand for those products.”

Mr Fisher said the 50-basis-point cut in the federal funds rate last week by the Federal Reserve Board was an “insurance cut” to show the market that the central bank stood ready to take further action in the event of a crisis.

“The 50-basis-point cut was … to show that the Fed will act and take out insurance in case of a possible downside.”

But he said it was not clear what action the Fed — which has said it will not move into negative interest rates — would take next.

He said the Fed was “between a rock and a hard place”.

“You do your best but you are cognisant of the fact that you don’t have a lot of ammo left.”

“(Fed chairman Jerome) Powell has said they are not going to going into negative interest rates. But the question is, what do they do next?”

He said options could include using its balance sheet for another exercise in quantitative easing, which it had done during the GFC.

Mr Fisher was on the Fed’s open market committee during the crisis, supporting its first two exercises in quantitative easing but opposing its third in 2009.

He said the Reserve Bank of Australia was in an even more difficult situation as its cash rate was now at 50 basis points, while the US federal rate was at 1 per cent.

He said he would not advise any economy to move into negative interest rates.

“This has not proven well in Europe or Japan,” he said.

“All of us have watched its questionable impact on the European economy.

“Even before the coronavirus crisis, Germany was on the verge of a recession.”

He said European banks were among the worst-performing in the world and negative interest rates had not helped to stimulate the Japanese economy.

Mr Fisher said Australia should consider reacting to the crisis with a fiscal policy stimulus.

“You have a predicted surplus,” he said. “You are going to have to use it.”