Fisher Says Fed Can't Cure U.S. `Fiscal Pathology'

Federal Reserve Bank of Dallas President Richard Fisher said monetary policy isn’t a “salve for the nation’s fiscal pathology” and that Congress should focus on reducing the federal deficit and creating incentives for companies to grow.

“There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity,” Fisher, 61, said in a speech in New York today. “The Fed has done much, in my words, to provide the bridge financing until the new Congress gets to work restructuring the tax and regulatory incentives American businesses need to confidently expand their payrolls and capital expenditures here at home.”

The Federal Open Market Committee last month voted to push ahead with its plan to stimulate the economy by purchasing $600 billion of bonds through June. Policy makers signaled they’ll probably continue their asset purchases until the recovery strengthens and many of the 15 million unemployed Americans find work, according to minutes of their Dec. 14 meeting.

Through its asset purchases, known as quantitative easing, the Fed runs “the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance,” said Fisher, who votes this year on the FOMC. The program “roughly means we are purchasing the equivalent of all newly issued Treasury debt through June.”

The decision to embark on a second round of bond purchases has aroused the harshest political backlash in three decades, with pressure to curb monetary stimulus mounting after Republicans won control of the House of Representatives.

Central Bank Oversight

Representative Ron Paul of Texas, a Republican who has advocated abolishing the Fed and is set to lead the subcommittee that oversees the central bank, expressed concern in a Bloomberg TV interview last month that the Fed won’t be able to avert an acceleration of inflation. Paul also said he won’t “right up front” push for an end to the institution.

Fed Chairman Ben S. Bernanke last week reiterated his call for a plan to reduce the federal budget deficit, saying “prompt adoption” of one by lawmakers could have economic benefits in the long and short run. A “credible” plan to reduce the deficit would avert inflation in the long term, Bernanke said in testimony before the Senate Budget Committee.

“Those lawmakers who advocate ‘Ending the Fed’ might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house,” Fisher said. “The Fed does not create government debt; fiscal authorities do.”

Deficit Projections

Economists at Goldman Sachs Group Inc. in New York are among those projecting the budget deficit this fiscal year will match 2010’s record $1.3 trillion gap after Congress last month passed legislation extending Bush-era tax cuts, reducing payroll taxes and renewing emergency jobless benefits.

Fisher said in response to audience questions that he considers himself a “proud hawk on inflation” and isn’t concerned that a rapid acceleration in prices is imminent.

“I don’t see inflationary pressures presently,” Fisher said. “The problem is getting the economy moving.”

Fisher also said he isn’t opposed to the idea put forth by some politicians that the central bank should focus solely on price stability and drop its goal of full employment.

“It would not break my personal heart if we ended up with a single mandate,” Fisher said in response to audience questions after a speech in New York. “The employment mandate is a bit of a slippery slope, it gets you into political issues.”

Plosser’s Doubts

Fisher and Philadelphia Fed President Charles Plosser, who has also expressed doubts about the central bank’s quantitative easing program and becomes a voting member on the FOMC this year, may pick up where Kansas City Fed President Thomas Hoenig left off by dissenting against the committee’s decisions, former Fed Governor Lyle Gramley said last month in a Bloomberg TV interview.

Hoenig was the lone dissenter last year, voting eight times against FOMC decision and tying former Governor Henry Wallich’s record in 1980 for most dissents in one year.

Plosser said yesterday in Philadelphia that the central bank may need to reassess its second round of asset purchases, dubbed “QE2” by analysts and investors, if the economic recovery continues to gain momentum.
“The aggressiveness of our accommodative policy may soon backfire on us if we don’t begin to gradually reverse course,” Plosser said.

Fisher said in response to questions from reporters that he expects the Fed to continue with its plans to buy bonds.
“I expect the program announced in November will be carried through,” Fisher said. He said he doesn’t know whether he will dissent at the FOMC’s next meeting.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net.