It is important that the Federal Reserve monitor the impact of rising
bond yields, but the central bank cannot live in fear of how markets
will react once it starts to withdraw stimulus, Richard Fisher,
president of the Dallas Federal Reserve Bank said.
"We cannot live in fear that gee whiz the market is going to be unhappy
that we are not giving them more monetary cocaine," he said following a
speech in Toronto.
Meanwhile, the Fed is poised to evaluate and potentially make changes to
its massive monetary stimulus, said Fisher, who has been critical of
the Fed's bond-buying program said.
Editor’s Note: Put the World’s Top Financial Minds to Work for You
To counter the financial crisis, the Fed dropped short-term interest
rates to near zero in late 2008 and has since bought more than $2.5
trillion in bonds to bolster what has been an anemic economic recovery.
Financial markets have been increasingly on edge on expectations that
the Fed is ready to start scrolling back on its stimulus.
"The plot now thickens," Fisher said. He likened developments in the
Fed's monetary policy to a Shakespearean play starring a "daring
captain," Fed Chairman Ben Bernanke, steering the ship of the U.S.
economy.
"Act IV, just beginning, will involve the drama of introspection, with
the FOMC evaluating the utility of its navigational tactics, and,
perhaps, fine-tuning them, if not altering the course," Fisher said,
referring to the Fed's policy-setting Federal Open Market Committee, in
remarks prepared for delivery to the C.D. Howe Institute Directors'
Dinner in Toronto. Fisher is not a voting member of the committee this
year.
"Only time will reveal the efficacy of current policy and whether the
risks that I and more experienced observers like Paul Volcker fret over
are as substantial as we surmise, or whether we have made much ado about
nothing," he added. Volcker was the chairman of the Fed from 1979 to
1987.
NO QE TO INFINITY
Fisher is a longtime critic of the Fed's current bond-buying program,
the Fed's third round of quantitative easing, known as QE3. He argues it
has done little to help the economy and poses a risk of doing great
harm.
He told the Toronto audience there was a "practical limit" to the size
of the Fed's balance sheet and investors should not expect "QE
infinity."
He later told journalists he had advocated for the Fed to begin slowing
the rate of purchases of mortgage-backed securities, but not stop them.
Asked if he was concerned about the impact of rising bond yields on the
economy, he said it should be monitored but that policymakers could not
let markets dictate policy.
"We cannot live in fear that gee whiz, the market is going to be unhappy
that we are not giving them more monetary cocaine," he said.
Fisher said he was not surprised to see a rise in bond yields given that
they are near historically low levels, adding that as a former hedge
fund manager he would be cautious.
Last week Volcker, who led the U.S. central bank's aggressive battle
against inflation, also sounded a warning on QE3, saying that central
banks are often too late in removing stimulus.
Fisher on Tuesday did not repeat his call, made most recently last
month, for the central bank to cut back immediately on its $85 billion
in monthly bond purchases, though he did reiterate his concerns.
While chances are "extremely low" that monetary policies will help push
inflation above the Fed's 2 percent target this year, the bond-buying
program is, "at best, pushing on a string and, at worst, building up
kindling for speculation and, eventually, a massive shipboard fire of
inflation," he said.
He noted that while there was disinflation in some categories such as
food, he was not worried as this was emboldening consumers.
Uncertainty over U.S. fiscal policy is keeping businesses from hiring,
he added, negating the power of the Fed's super-easy policies.
Even so, recent job gains and retail sales suggest the recovery is
strong enough "to propel hopes that consumption will help employment
growth gradually improve over the long term," Fisher said.
Unemployment is expected to remain at 7.5 percent when the U.S. government releases its May jobs report this Friday.
Bernanke last month said the central bank needs to see further signs of
traction before easing up on its monetary stimulus, but also said a
decision to do so could be made at one of the Fed's "next few meetings"
if the economy looked set to gain momentum.
Editor’s Note: Put the World’s Top Financial Minds to Work for You
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