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Fisher: Fed's QE May Become ‘Hotel California’ Trap

Friday, 14 December 2012 10:55 AM

Federal Reserve Bank of Dallas President Richard Fisher said the central bank may never be able to exit its unprecedented bond-buying program and that the efficacy of the stimulus measure is “declining over time.”

“Since we’re going to have an engorged balance sheet we may never be able to leave this position,” the reserve bank chief said in a CNBC interview Friday. “We were at risk of what I call a ‘Hotel California’ monetary policy, going back to the Eagles song which is: 'you can check out any time you want but you can never leave'.”

Fed Chairman Ben S. Bernanke and his colleagues said Dec. 12 they will boost their main stimulus tool by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion in mortgage debt a month. That decision puts the Fed’s $2.92 trillion balance sheet on track to reach almost $4 trillion by the end of next year if purchases continue.

“Their efficacy is declining over time,” Fisher said. “With each new announcement there’s less of a reaction.”

Fisher, who participates in the Federal Open Market Committee meetings and doesn’t vote this year, said he opposed the Fed’s expansion of its third round of bond purchases, known as quantitative easing, because policy makers have already ensured that the financial system has adequate funding.

“I thought we had done enough already,” Fisher said. “Businesses are awash in liquidity.”

The U.S. economy is the strongest in the world right now, Fisher said. It’s being hurt because of uncertainty surrounding Congress and President Barack Obama’s failure to agree on a budget plan that avoids a fiscal contraction, Fisher said.

‘The Thoroughbred’

“We’re the thoroughbred of the global economy,” Fisher said. “Our businesses are better equipped now to compete in the world than ever before. They’ve driven down their costs. They’re hyper-efficient. They’re hyper-productive.”

The world’s largest economy is poised to reach its full potential if lawmakers can remove uncertainty for businesses, investors and consumers, he said. Fed policy makers are “the only people who get things done” and have already taken all the action they can to support the recovery, he said.

“The obstacle is nobody knows what the rules are so they can’t plan their investment,” Fisher said of the so-called fiscal cliff of more than $600 billion in tax increases and federal spending cuts scheduled to take effect in January unless lawmakers agree on a plan. “We’re beginning to see now this fiscal imbroglio as really impacting consumer behavior.”

6.5% Unemployment

The Fed also said Dec. 12 that for the first time it will link its interest-rate outlook to economic thresholds, saying rates will stay low “at least as long” as the jobless rate remains above 6.5 percent and if it projects inflation of no more than 2.5 percent one or two years in the future. Officials don’t see the jobless rate falling near that goal until 2015.

Fisher said policy makers discussed whether the jobless rate may decline to 6.5 percent because more Americans are giving up hope of finding a job and instead are deciding to leave the labor force, not because hiring picked up.

“We actually talked a great deal about that,” Fisher said of the Fed’s Dec. 11-12 gathering. “All of us are concerned about it. And that’s why if you look at the wording of the statement there’s a lot of conditionality around that.”

The Labor Department’s Dec. 7 report showed that the unemployment rate fell to 7.7 percent last month as the share of working-age people in the labor force decreased. The so-called participation rate fell to 63.6 percent from 63.8 percent in the prior month. The rate declined to 63.5 percent in August.

Fisher, 63, will be a voting member of the policy-making FOMC in 2014. He dissented last year twice against moves to push down long-term rates and to keep the benchmark U.S. interest rate near zero until at least mid-2013. He voted five times in 2008 in favor of tighter policy.

The next FOMC gathering is scheduled for Jan. 29-30 in Washington.

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Dallas Fed President Richard Fisher said the central bank may never be able to exit its unprecedented bond-buying program and that the efficacy of the stimulus measure is declining over time.
Friday, 14 December 2012 10:55 AM
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