The Federal Reserve has warned U.S. money market funds to cut their investments in Europe, a top official says.
“The Fed and regulators have tried to stress to money market funds to reduce their exposure to European financial institutions,” Charles Plosser, the president of the Reserve Bank of Philadelphia, told the Wall Street Journal.
Investors probably expect that their fixed-income money managers exited highly risky European banks some time ago. Nevertheless, the fact that the Fed would be advising funds to get out highlights how nervous and uncertain the U.S. central bank remains about Europe’s debt crisis.
The U.S. financial sector has been trying to insulate itself from the fallout of a break up of the euro zone, or other crisis-driven event, Mr. Plosser told the Journal’s Brian Blackstone.
The Fed official acknowledged that an implosion in Europe could lead to another global credit crunch. But he added that he thinks a more likely scenario will be capital pouring into the U.S. in search of safety.
Mr. Plosser summed up the steady stream of news out of Europe right now as nothing more than “noise,” and advised investors to focus on U.S. fundamentals. He forecasts that GDP will expand by between 2.5 per cent and 3 per cent this year.
“There’s absolutely no reason for people in the United States to get all in a dither,” he said about the European crisis. “They can’t do anything about it for one thing. It’s important to keep your focus on the medium to longer-term on what’s happening in the U.S. economy.”
Mr. Plosser is considered a policy hawk who puts inflation control ahead of stimulus. He reiterated his position that he saw no reason to extend Fed stimulus right now and he said the last round, known as Operation Twist, has had no impact.