NEW YORK – While praising the Federal Reserve for pulling America from the brink “when the Panic of 2008 occurred,” Federal Reserve Bank of Dallas President and CEO Richard W. Fisher Friday warned that there are costs to the Fed “overstaying its welcome” and suggested the Fed consider cutting back its latest accommodation.
“In my view, no amount of further accommodation by the Fed would be wise—either by prolonging or `tapering off’ the volume of purchases of Treasuries past June, or adding another tranche of large-scale asset purchases. Indeed, it may well be that we should consider curtailing what remains of QE2,” Fisher told the Society of American Business Editors and Writers, according to prepared text released by the Fed. “Now, we at the Fed are nearing a tipping point. 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 said the Fed can’t offer the perception that it is monetizing “the debt of fiscally imprudent government. Throughout the history of nations, monetizing the budgetary excesses of governments has proven to be a direct path to economic perdition. Having already peeked inside that door, I feel strongly that we must now shut it, lock it and throw away the key.”
Failure to fight off inflation is another risk, he said. Businesses are trying to price in hikes in prices of fuel, other commodities and materials. “My gut tells me that this will result in some unpleasant general price inflation numbers in the next few reporting periods,” Fisher said.
“Given that we still have significant excess capacity of unemployed workers, extremely subdued wage growth, strong productivity growth and weak domestic demand, one might reasonably posit that the general inflationary pressures we are experiencing presently are transitory,” he said. “Nonetheless, adding still more liquidity, or not withdrawing in a timely manner what we already provided in abundance, would do nothing to quell emerging inflationary pressures and might well compound them, proving doubly injurious to savers and the earnings of those who do have jobs.”
Additionally, Fisher said Congress must stop the “budgetary death spiral” and get the budget balanced. “Congress must find a way to align spending with income through taxation that (a) does not cut off the incipient economic recovery, (b) provides a credible path toward bringing their accounts ¯ including the unfunded liabilities of Medicare and Social Security ¯ to solvency and (c) respects the fact that in a globalized, cyberized world, those with the ability to create jobs may create them in places that offer more compelling fiscal and regulatory environments.”
While it won’t be easy to get the budget balance, Fisher said, “there are worse alternatives.”
On the positive side, Fisher said “the exigent measures” the Fed “undertook worked. The end result of the Fed’s efforts was that the credit markets and the lifeblood of liquidity needed to conduct commerce and sustain the economy were restored. The economy responded and began a recovery in the middle of 2009 that is slowly gaining steam and now appears to be self-sustaining.”
While the goal was accomplished, Fisher said, “it can be argued that we protected imprudent lenders and investors from the consequences of their decisions; we rescued sinners and penalized the virtuous.”
Also, the “too big to fail” firms now have “even greater financial power. (And, adding insult to injury, by the grace of their shareholders, most of their leaders retain their posts and few, if any, have suffered financial setbacks). This concentration of power comes at the expense of community and regional banks, an imbalance that the Federal Reserve and other authorities must now address through tough-minded, clear-eyed regulation.”
While these costs wear on Fisher, he said, “on net, I believe the Federal Reserve did what is expected of a responsible central bank: We stemmed a panic and averted a depression.”
