With the U.S. economy in the early stages of recovery, the Federal Reserve must find ways to withdraw unprecedented monetary accommodation without disrupting that progress, a top Fed official said on Wednesday.
But to do so effectively, argued Dallas Fed President Richard Fisher, the central bank must retain independent oversight of monetary policy, which he said is currently under threat from several legislative proposals that could subject policymakers to "congressional second-guessing."
"As the need for monetary accommodation lessens, my colleagues and I on the FOMC must find ways to unwind the Fed's much-expanded balance sheet with the deftness to minimize credit market disruptions and the timeliness to avoid inflationary pressures," Fisher said in prepared remarks to a business group in Dallas.
"We are constantly discussing internally the ways and means to shrink our balance sheet back to historical norms, aiming to have our holdings once again consisting primarily of Treasuries needed for the regular operations we undertake as the nation's central bank."
His comments come as congressional testimony from Fed Chairman Ben Bernanke offered the most detailed look to date into the central bank's roadmap for pulling back from its unprecedented emergency measures.
The Fed has pumped more than $1 trillion into the economy after slashing benchmark interest rates to near zero to help pull the U.S. from what Fisher on Wednesday called a "hellish economic downturn."
While the economy has begun to recover, "there remain many roadblocks that must be overcome before we will be able to breathe easy again," Fisher said.
The U.S. economy has recently emerged from its worst recession since the 1930s, expanding at a solid 5.7 percent annualized rate in the fourth quarter.
But Fisher saw plenty of impediments to sustaining this performance.
"Businesses must develop sufficient confidence in the future to begin expanding their order books and their payrolls. Banks must be willing and able to lend again," he said.
"Consumers must regain their wherewithal and the confidence to open their pocketbooks."
More broadly, Fisher reiterated his concern about the fiscal deficit, as government spending on programs such as Medicare increases even as tax receipts dwindle.
He also saw the risk that "Congress will seek to politicize the Federal Reserve."
Borrowing costs for the U.S. government remain low, in part because concerns over sovereign debt in Greece and other European countries have drawn investors to the relative safety of U.S. debt, he said.
But eventually, the U.S. will have to address the fiscal situation head-on.
"As bad as the situation is, I know one thing that would make it worse, and that is if the Congress took the easy way out by turning to the Fed to simply print our legislators' way out of their misery, devaluing the debt they have incurred through their spendthrift ways."
Fisher is not a voter on the Fed's monetary policy setting panel this year.
Bernanke on Wednesday said that while the economy still needs accommodative monetary policy, "at some point" the central bank will need to tighten financial conditions.
He said it will likely begin that process by removing some cash from the financial system before raising interest rates.
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