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Dallas Fed's Fisher Warns of 'Uncharted Waters'

Sunday, 23 Sep 2012 05:14 PM

The Federal Reserve's decision to jolt the economy a third time with monetary stimulus measures won't help the country much but could stoke  inflationary pressures down the road, said Dallas Fed President Richard Fisher, a noted inflation hawk.

The Federal Open Market Committee (FOMC) recently announced plans to buy $40 billion in mortgage-backed securities from banks a month on an ongoing basis to spur recovery by injecting liquidity into the financial system in a way that lowers interest rates across the economy.

Such a policy tool — known as quantitative easing but dubbed by many as merely printing money out of thin air — follows two similar rounds in the past that have flooded the economy with trillions of dollars with the hope of encouraging investing and hiring.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Fisher and other Fed hawks have pointed out that the such easing won't bring the lasting recovery the economy needs and instead argue Congress must address fiscal issues such as tax uncertainty, debts and deficits.

"It will come as no surprise to those who know me that I did not argue in favor of additional monetary accommodation during our meetings last week. I have repeatedly made it clear, in internal FOMC deliberations and in public speeches, that I believe that with each program we undertake to venture further in that direction, we are sailing deeper into uncharted waters," Fisher told the Harvard Club recently, according to prepared remarks of his speech.

Despite all the models and resources at the Fed's disposal, uncertainty is a very difficult factor to plug into assumptions when forecasting the economy.

"The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course," Fisher said.

"And nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank—not, at least, the Federal Reserve—has ever been on this cruise before."

The Federal Reserve adheres to a dual mandate to keep prices stable and unemployment rates optimal.

The Fed sets monetary policy by targeting inflation rates to 2 percent, but many market experts say the latest stimulus policy reflects the Fed's desire to prioritize the unemployment portion of its mandate way above keeping inflation rates in check.

In other words, the Fed is so willing to keep its foot on the gas pedal and risk seeing inflation rates rise above target levels in order to see unemployment rates fall that the country is steaming ahead deeper into unfamiliar waters.

“Not only will they tolerate higher inflation, not only will they wish for higher inflation, but they actually may target higher inflation,” Mohamed El-Erian, CEO of Pimco, manager of the world’s largest bond fund, told CNBC.

Central banks elsewhere have rolled out similar measures, flooding the world with inflation-fueling liquidity.

“This is true for all central banks — the (European Central Bank), the Fed, the Bank of Japan, the Bank of England. We are so deep into unfamiliar territory, so deep into experimental mode, that we don’t know what the consequences will be,” El-Erian said.

“Whoever comes afterward will have to clean up the mess.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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The Federal Reserve's decision to jolt the economy a third time with monetary stimulus measures won't help the country much but could stoke inflationary pressures down the road, said Dallas Fed President Richard Fisher, a noted inflation hawk.
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2012-14-23
 

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