2012-08-07 16:25:11

As Election Looms, Fed Head Sees Policy Issues

DALLAS - New steps by the U.S. Federal Reserve to stimulate the economy so close to a presidential election would be a mistake, a top Fed official said on Monday, warning it could create a false impression of bowing to political pressure.

Richard Fisher, president of the Dallas Federal Reserve and a consistent hawk on monetary policy, said the real problem with the economy, and the stubbornly high jobless rate, is Congress's lack of action on fiscal policy.

Fisher, who spoke to Reuters roughly six weeks ahead of a Fed policy meeting that many see coming at a critical juncture, said any perceptions that the U.S. central bank could be motivated by political factors are untrue -- but the Fed must guard against any misimpressions.

Many economists and financial market players expect that the Fed, when it next meets in mid-September, could decide to undertake a third round of quantitative easing. Any such decision coming just weeks ahead of a showdown between President Barack Obama and presumed Republican nominee Mitt Romney, could be construed as being politically motivated, Fisher said.

But nothing could be farther from the truth, Fisher said Monday, noting the stance of Fed Chairman Ben Bernanke.

"I don't believe that's the case," he said. "I know that's not the case with Ben, but I'm afraid that as we get closer to election season, that people in the marketplace or elsewhere might draw that conclusion, and it might come back to haunt us."

Among the worst outcomes, he said, would be if the Bernanke Fed were compared to the central bank under Arthur Burns, the chairman who in the 1970s is seen to have allowed inflation to run rampant in part to help President Richard Nixon's bid for the presidency.

"I don't think this should inhibit a decision if it's a right decision," he added, "but I wouldn't want to see this torque up the political tension that surrounds the central bank."

Fisher said he has no doubt the Fed would in theory be able to push down mortgage rates further with more purchases of housing-backed bonds, but that doing so likely won't bring down unemployment. A government jobs report released on Friday showed the jobless rate ticked up to 8.3 percent in July.

"We are at a point where theory collides with the practical," he said. "We have hit a wall, and that wall is called Congress."

The Fed, which met last week ahead of the jobs report, stood pat on policy, leaving interest rates near zero and keeping intact its forecast that rates will stay ultra-low until at least late 2014. It signaled, however, that it was prepared to act unless the economy stages an unlikely comeback soon.

The political conversation surrounding Fed policy was clear in comments made over the weekend by Romney, who voiced his opposition to more Fed easing. "I don't think a massive new QE3 is going to help this economy," he said.

Fisher, who said he had not seen Romney's comments, blamed employers' reluctance to hire on the unpredictability of both tax rates and government spending patterns. He said that none of the big corporate chief executives he talks to believe there is a case for more policy easing, action that typically lowers interest rates, weakens the dollar and boosts the value of stocks and other assets, which can make people feel richer, inducing them to spend.

But with U.S. rates already near zero and Europe's sovereign debt crisis driving a safety bid for low-yielding U.S. Treasuries and other dollar-based assets, easing measures would have limited impact.

The Fed has already taken steps to try to help the economy at two of its five policy meetings this year: in January pushing out its pledge on maintain ultra-low rates until at least late 2014, and in June extending by six months its so-called Operation Twist program aimed at lowering long-term interest rates.

If the Fed launches another round of easing, Fisher said, "Those that do not like us as central bankers I think will be apoplectic."


Fisher said he is not currently worried about rising prices, at least in the short term, but he has concerns about the ability to keep inflation near the Fed's 2 percent target rate once the economy picks up.

The Fed has publicly mapping out an exit plan that calls for raising rates and eventually sell securities acquired in its effort to push down long-term rates.

Fisher, however, was skeptical about the plan's effectiveness, especially if the Fed keeps adding to its balance sheet with more bond purchases.

"It's easy to say, but it may be more difficult to do," he said.

Even so, Fisher is optimistic about the potential for a sudden surge in growth, given that many companies have boosted productivity and strengthened their balance sheets since the financial crisis.

"I think the U.S. is ready to rock and roll," Fisher said, adding, "there is a throttling mechanism which is called fiscal policy."

Even if Congress acts to avert the so-called fiscal cliff of tax increases and spending cuts set to take place at the end of the year, those fixes will do nothing to boost hiring. Companies simply cannot take on new employees if they do not know what their taxes will be, Fisher said.

"If our fiscal guys could only get their act together," he said, "we could unleash enormous growth in this country."

U.S. Budget


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