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Fed's Fisher: Cut Back on Bond Buying This Year

Thursday, 21 February 2013 03:42 PM

The Federal Reserve should cut back on its bond-buying program "sooner rather than later" and probably before the end of the year, a top Fed policymaker said on Thursday, suggesting that purchases of housing bonds could be among the first to go.

"You don't go from Wild Turkey to cold turkey, you have tapering in between," Dallas Fed President Richard Fisher told Reuters in an interview. "If the economy continues to improve, I personally would expect that to be sometime this year."

Fisher has long been a vocal critic of the Fed's exceptionally loose monetary policy, including the U.S. central bank's long-term commitment to keeping interest rates near zero and its current program of quantitative easing that has it buying $85 billion in Treasuries and mortgage-backed securities each month to push down long-term borrowing costs.

His views are often wide of the consensus, which he readily admits.

Lately, though, his perspective seems to be gaining wider acceptance among Fed policymakers. Minutes from the Fed's last policy meeting showed this week that a number of officials think the central bank might have to slow or stop buying bonds before seeing the increase in hiring that the program is designed to deliver.

"I'm not alone anymore," Fisher said. "I am very pleased that some people with much more prodigious brains than I am able to possess are raising some questions."

The Fed has said it would keep buying bonds until the labor market outlook improves substantially.

Fisher acknowledged current slow economic growth in the United States but said "we should begin to taper this thing off as unemployment improves and as long as we don't see inflation rear its ugly head."

"I don't care whether you're a hawk or a dove, no one on the (policy-setting) committee wants to do it radically. What you want to do is do it sensibly," he added.

Fisher suggested the Fed could do worse than begin by cutting back on its support of the housing market. Purchases of mortgage-backed securities were initially useful in pulling the housing sector from its devastating slump, but by now have served their purpose, he said.

"I understand the fear of sliding backwards," he said from his 12th floor office in downtown Dallas. "I just don't personally feel the need for further mortgage-backed activity, but the majority rules, and I've been in the minority on that front."

Fisher is not a voting member of the Fed's policy-making panel this year.



After the latest minutes were released Wednesday, market participants were left with the impression that policymakers are growing still less unified about keeping up quantitative easing. On Wednesday, the benchmark S&P index suffered its biggest decline since Nov. 14.

"If that (the stock-market drop) is attributable to the idea that we might eventually taper, then that worries me because that just means you've got a market that's hooked on the drug that you've been providing," Fisher said.

In a policy shift late last year, the Fed also committed to keeping interest rates near zero until the unemployment rate drops to 6.5 percent, as long as inflation is not forecast to go above 2.5 percent over a one- to two-year horizon.

Unemployment ticked up last month to 7.9 percent.

While the Fed's bond purchases and low-rate commitment have helped keep down bond yields and boost stocks, Fisher said, they have had only a muted impact on the jobs market.

"Is the wealth effect strong enough to have an effect on unemployment?" he asked. "So far it has not, in my view. It may have stopped some backsliding but it hasn't led to robust employment growth that is the objective of everybody at the table whether you are a hawk or a dove."

Unemployment and manufacturing data on Thursday did little to suggest the economy will grow faster this year than the 2 percent clip most economists are expecting. That should bolster the case for easy Fed policy.

The Fed has more than tripled the size of its balance sheet since 2008 to around $3 trillion through its bond purchases, which are designed to hold down the cost of long-term borrowing and spur a stronger recovery.

Some policymakers, including Fisher, fear that shrinking the balance sheet in the future will be difficult and could disrupt markets.

"The more we do, the further into uncharted territory we sail, and how do we get out of it?" he said Thursday.

But his more immediate concerns focused on the slim benefits and potentially detrimental effects of the Fed's ongoing bond purchases.

"I'm uncomfortable as a former market operator having what is essentially an artificial market that has been engineered by the central bank," he said. "It's one thing to try to ignite growth, but if you are in a situation where you have to keep doing this, it becomes a distortion."

Fisher repeated his view that the lack of a clear fiscal policy outlook - "we don't have fiscal direction in this country, we have fiscal confusion" - and weak demand were holding the economy back as well, adding that monetary policy on its own cannot boost growth.

"Pouring more into the system, spiking the bowl even further as we have done, may not be the most efficacious way to do things," he said.

© 2018 Thomson/Reuters. All rights reserved.

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The Federal Reserve should cut back on its bond-buying program "sooner rather than later" and probably before the end of the year, a top Fed policymaker said on Thursday, suggesting that purchases of housing bonds could be among the first to go.
Thursday, 21 February 2013 03:42 PM
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