Frank Lucas Questions Fed Chair on Unintended Effects of Quantitative Easing On Farm PolicyWed, 12 Feb 2014 14:40:01 CST
House Agriculture Committee Chairman Frank Lucas (R., Okla.) discussed issues associated with the agricultural economy with Federal Reserve Chairwoman Janet Yellen on Tuesday during a House Financial Services Committee Hearing.
Lucas was mainly concerned with the effects of the Fed's Quantitative Easing policy on asset prices. He outlined the stock market rebound since its crash in 2008 and the continuing climb in farm land prices that mirrored the stock market. Lucas asked Yellen if the boost in liquidity resulting from Quantitative Easing had bled over into land prices.
"I will not profess to be an expert on land prices," Yellen said, "but I think land prices have been going up at a remarkable rate even before the stock market began to recover and have certainly caught our attention as an area where we would be concerned about valuations. We've been watching that very closely."
Lucas said he was concerned that Quantitative Easing would have an opposite and unintended effect on farm policy as codified in the new farm bill when the program was meant to boost the housing market.
"If resources becoming so plentiful spread out into the economy away from housing, if it distorts the decision-making process, I mean, in the farm bill this time we did away with the old direct payment program, basically taking four billion dollars each year out of the farm economy in a effort, part of which, to address that issue. But if all this money is churning and once these rates return which appear to be so dramatically greater than anything else you can invest in and whether it's farm land or the appreciation in stock, I guess what I'm asking you is-as you noted, the Fed watches these things-but when we undo Quantitative Easing, what's the effect going to be on things like farm land prices or stock market prices, equities?"
Yellen said, "I would agree that one of the channels by which monetary policy works is asset prices. And we have been trying to push down interest rates, particularly long-term interest rates. Those rates do matter to the valuation of both stocks, houses and land prices. And, so, I think it's fair to say that our monetary policy has had an effect of boosting asset prices. We have tried to look carefully at whether or not broad classes of asset prices suggest bubble-like activity. I have not seen that in stocks, generally speaking. Land prices, I would say, suggest a greater degree of overvaluation."
Lucas said he was concerned that the QE program, unintentionally, has created a bubble in farm prices much like that found in housing prices. He hinted that he didn't think the Fed would be able to prevent a crash in prices when the Quantitative Easing is ended.
"The consequences of that are most unnerving. Your predecessor once in a response to a question from me, I asked 'When will you know to undo the Quantitative Easing?' his response was 'We'll know.' And my question then was, 'If you didn't know the problem was coming, how are you going to know when the problem is fixed to undo?' So, I appreciate the challenges you face. I certainly wouldn't want your job, but then it took us two and a half years to do a farm bill, too."
Yellen tried to reassure Lucas that the Fed has everything under control.
"Well, we will watch asset prices very closely and recognize that they can be a sign of excesses developing."
You can watch Lucas's exchange with Yellen by clicking in the video box below.
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