The U.S. Federal Reserve may need to end its $600 billion bond-buying program early and withdraw liquidity in a timely way to avoid stoking runaway inflation, a top Fed official said on Friday.
Warning of rising inflationary pressures overseas and "unpleasant" U.S. inflation data ahead, Dallas Fed President Richard Fisher called on the U.S. central bank to stop "spiking the punch bowl" with more accommodative policy and return its operations to normal after more than two years of unprecedented monetary policy.
Fisher, a self-proclaimed inflation hawk, backed the Fed's first round of asset-buying in 2009 to aid the recession-ravaged economy. He opposed its second round of quantitative easing, or QE2, but lent his support to the program once it began, and until now had said he expected the program to run as planned through June.
"No amount of further accommodation by the Fed would be wise — either by prolonging or 'tapering off' the volume of purchases of Treasurys past June, or adding another tranche of large-scale asset purchases," Fisher said in remarks prepared for delivery to the Society of American Business Editors and Writers.
"Now, we at the Fed are nearing a tipping point," Fisher said.
"Indeed, it may well be that we should consider curtailing what remains of QE2," said Fisher, who is a voter this year on the Fed's policy-setting panel. "Just as we pressed on in doing our duty through extraordinary, exigent measures, we must now discipline ourselves to just as persistently normalize our operations in a timely way."
Fisher and a handful of like-minded Fed policy makers have pushed noisily in recent weeks for the central bank to heed signs of incipient inflation and begin to think about raising rates, as the European Central Bank did on Thursday for the first time since 2008.
But Fed Chairman Ben Bernanke and other core members of the Fed's policy setting committee have said the recovery is too fragile to withdraw support yet.
Unemployment registered 8.8 percent in March, and while the economy grew a healthy 3.1 percent in the fourth quarter, that pace is not fast enough to quickly make up for the steep losses of the Great Recession.
High unemployment and subdued wage growth suggest inflation pressures may be transitory, Fisher said on Friday, but the Fed should not risk compounding those pressures by adding more liquidity, or failing to withdraw "in a timely manner what we already provided in abundance."
The latest round of purchases, slated to end in June, has swelled the Fed's balance sheet to a record $2.63 trillion, data on Thursday showed.
The extra liquidity has begun to lure private equity firms and asset managers into the very excesses that preceded the 2007-2008 financial crisis, including easy loan terms, high levels of borrowing, and exotic asset classes, Fisher said.
"These are all signs of the intoxicating effects of the ambrosia of inexpensive and plentiful money," he said. "Further spiking the punch bowl with accommodative monetary policy would do nothing to rein them in."
U.S. inflation, as measured by the Dallas Fed's trimmed-mean rate, has run at a "sedate" 1.2 percent over the past six months, he said. But prices of fuel and other commodities are surging.
"My gut tells me that this will result in some unpleasant general price inflation numbers in the next few reporting periods," he said.
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