Fed's Fisher: Monetary Policy Can't 'Offset Rot Destroying Fiscal House'

WASHINGTON — Dallas Federal Reserve Bank President Richard Fisher said Thursday that with each asset purchase, the central bank inches closer to the tipping point when it is acting "as an agent of financial recklessness."

Fisher said the Fed's policymaking Federal Open Market Committee actually "risks exacerbating" financial recklessness with its current accommodative policy of buying $85 billion a month in Treasuries and agency mortgage-backed securities purchases.

"There is a tipping point where monetary accommodation comes to be viewed not as a pleasant stimulus that levitates bond and stock and housing markets leading to a felicitous 'wealth effect,' but instead as an agent of financial recklessness," Fisher said in remarks prepared for the Economic Club of New York.

"None of us really know where that tipping point is," he added. "But with each dollar of Treasury and MBS purchases the FOMC instructs the New York desk to make, we inch closer to it."

Fisher, who will vote on the FOMC next year, said earlier this week that it would be hard for him to make the case for the Fed to taper its quantitative easing program.

But even with a continued easy money policy, Fisher said the central bank can't make up for fiscal disorder, which led to partial government shutdown since the end of September and uncertainty over whether Congress would reach a last-minute deal to raise the statutory debt limit, risking the nation's ability to pay its bills.

"Unless the fiscal authorities get their act together, looking to the Fed to solve the nation's economic ills through ever-expansive monetary policy might well make the situation worse," he said.

This speech comes the morning after the Senate and House affirmed a deal to open the government and extend the debt ceiling, but Fisher said the last-minute agreement "will not solve the pathology of fiscal misfeasance that undermines our economy and threatens our future."

He added: "My heart bleeds for my country, for no amount of monetary accommodation, no conceivable amount of 'large-scale asset purchases,' no clever new monetary innovation by the Federal Reserve can offset the rot that is destroying our fiscal house and the blight it spreads over our economy."

Still, Fisher said the Fed "will take all appropriate measures to preserve money market functioning and stability in periods of acute distress." He said it's an "integral" part of the dual mandate because "chaotic money markets threaten both price stability and business activity and employment."

However, he continued, "it is not our job to fix the budget impasse. Any initiatives we might have to undertake in the course of our duty as a central bank to prevent serious disruptions of U.S. dollar funding markets should not be executed in a way that they might be construed to substitute for fiscal redress."

Fisher also warned that markets are restless and the bond market "is beginning to show us the back of its hand," adding "there is little remaining tolerance for agreeable but unsound decisions."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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