On a day when the head of the Federal Reserve said it isn’t the time to take away stimulus from the U.S. economy, he got some support from another central bank policy maker.
Federal Reserve Bank of Dallas President Richard Fisher said “there remain many roadblocks that must be overcome before we will be able to breathe easy again.” Central bank actions that have provided liquidity to markets “have led to a resumption of private credit flows and a reduction in private sector borrowing costs.” That said, “we still have work to do,” even as policy makers must begin the process of figuring how to eventually unwind its current slate of policy efforts, the official said.
Fisher isn’t a voting member at this year’s Federal Open Market Committee meetings. At the last gathering in late January the interest rate setting body maintained its current near-zero percent interest rate policy and pledged to keep it that way for an extended period, as a modest recovery forms in the absence of inflationary pressures. Most economists believe it will not be until the middle of the year or later before the Fed contemplates raising rates.
In testimony Wednesday, Fed Chairman Ben Bernanke told Congress the central bank has “promoted economic recovery through sharp reductions in its target for the federal funds rate and through purchases of securities. The economy continues to require the support of accommodative monetary policies.”
Fisher said he is “sympathetic” to the view the central bank should stop pledging to keep very low interest rates in place for an extended period. Kansas City Fed President Thomas Hoenig had dissented at the late January FOMC meeting, believing the Fed no longer needs to make that pledge.
Fisher also said the unexpected improvement in the January unemployment rate may not be sustained, and he explained it will be a long slow process of recovery for hiring in the U.S.
The official also said he’s confident the mortgage market will be fine after the central bank ends its purchase of housing-related bonds in March. The effort to buy $1.25 trillion in mortgage securities, which ends in March, was a “deliberate attempt to impact the markets, to keep rates in all private markets lower,” and “it succeeded,” Fisher told an audience in Dallas.
Currently the spread — or difference — between Treasury securities and mortgage debt is “abnormally low,” the official said. “As we have announced we would terminate that program it hasn’t expanded very much. That indicates, possibly, the markets are much healthier than they were before, so we did our job.”
The Dallas Fed chief’s speech was largely about the scary financial situation facing the U.S. government. It was also an argument against congressional efforts to change how the Fed operates. But Fisher did have a few things to say about the economy.
“We are slowly clawing our way back from the edge of what could have been a repeat of the Great Depression,” he said, adding “we are seeing some signs of improvement” on many fronts, “however hesitant they might be in the incipient stages of a recovery.”
Fisher said the two “significant obstacles” holding back consumers and businesses are “widespread concern” about government deficits, along with fears over congressional efforts to “politicize the Federal Reserve.”
As he has before, Fisher says the nation’s political class must put aside its partisan difference and do something meaningful about eliminating the sea of red ink.
Fisher cautioned Congress that it needs to keep its hands off the Fed, and that attempts to audit the central bank’s monetary policy-making ability will only lead to bad economic outcomes.
“When fiscal authorities turn to monetary authorities to monetize their debts, the result is inevitably financial disaster,” Fisher said. “It is important that the Federal Reserve be left to do its job and no more,” he said, adding “a great and powerful economy cannot create the conditions for sustainable, noninflationary growth if its central bank is governed by a politicized monetary authority.”
Fisher admitted the very low rates set by the Fed during the middle of the last decade played a part in creating the financial crisis. But “this does not mean, however, that those who dwell in the political realm should try to ‘fix’ the problem by throwing themselves into the monetary mix.”
“I would advise the Congress to leave well enough alone,” Fisher said.