With the housing market seemingly back on track, buying $40 billion of mortgage-backed securities a month risks "overkill," and the Fed should cut back on its purchases, Federal Reserve Bank of Dallas President and CEO Richard W. Fisher said Wednesday.
"The fact that the housing-market gears have now begun to mesh is why I believe we are running the risk of overkill by continuing our mortgage-backed securities purchase program at the current pace and would suggest tapering off those purchases," he told Columbia University's School of International and Public Affairs, according to prepared text released by the Fed.
Despite the low interest rate environment, unemployment remains high. "To be sure, as mentioned, businesses have been able to improve their balance sheets and are enjoying higher stock market valuations of their businesses," Fisher said. "However, thus far, businesses have pursued payroll-expanding job creation with less enthusiasm than had been hoped for. Unemployment remains annoyingly high."
Employers choose to delay "long-term commitments, including hiring significant numbers of permanent workers" because of "uncertain growth prospects for the goods and services they sell at home, where consumption is retarded by slow growth in employment and, lately, by the increase in payroll taxes. And abroad, these employers point to the dampened consumption stemming from the economic debacle in Europe and its knock-on effects on China and the export-led emerging economies."
Additionally, fiscal policy and uncertainty about taxes, federal spending, and "their cost structures of the seemingly endless expansion of health care and other mandates and regulations, however meritorious their intention."
Others, he said, "worry that the Fed's contortion of the yield curve and cost of money cannot last forever, or, if it lasts too long, will eventually result in financial bubbles and/or uncontrollable inflation, adding another uncertainty to the plethora of uncertain factors that already plague them."
Overall, Fisher said he believes "the policy of super-abundant money at costs deviating substantially from normal equilibrium levels may ultimately prove to be counterproductive."
While Fisher argued against QE3, since it was implemented, "the fixed-income and stock markets are hooked on the monetary Ritalin that we have dispensed in ever-larger doses, it would, in my opinion, do great harm to force a sudden withdrawal. So, I have argued that it would be best to taper the dose of QE so that markets can adjust gradually to the eventual removal of this treatment and return to pricing securities on the basis of fundamentals."
