Fed Official: Policymakers May Have to Alter Course

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Getty ImagesRichard Fisher, president of the Federal Reserve Bank of Dallas.
By Jeffrey Hodgson and Andrea Hopkins

TORONTO -- The U.S. Federal Reserve is poised to evaluate and potentially make changes to its massive monetary stimulus, a top Fed official who is critical of the Fed's bond-buying program has said.

To counter the financial crisis, the Fed dropped short-term interest rates to near zero in late 2008 and has since bought more than $2.5 trillion in bonds to bolster what has been an anemic economic recovery. Financial markets have been increasingly on edge on expectations that the Fed is ready to start scrolling back on its stimulus.

"The plot now thickens," Richard Fisher, president of the Dallas Federal Reserve Bank, said Tuesday. He likened developments in the Fed's monetary policy to a Shakespearean play starring a "daring captain," Federal Reserve Chairman Ben Bernanke, steering the ship of the U.S. economy.

"Act IV, just beginning, will involve the drama of introspection, with the FOMC evaluating the utility of its navigational tactics, and, perhaps, fine-tuning them, if not altering the course," Fisher said, referring to the Fed's policy-setting Federal Open Market Committee, in remarks prepared for delivery to the C.D. Howe Institute directors' dinner in Toronto. Fisher isn't a voting member of the committee this year.

"Only time will reveal the efficacy of current policy and whether the risks that I and more experienced observers like Paul Volcker fret over are as substantial as we surmise, or whether we have made much ado about nothing," he added. Volcker was the chairman of the Fed from 1979 to 1987.

No QE-to-Infinity

Fisher is a longtime critic of the Fed's current bond-buying program, the Fed's third round of quantitative easing, known as QE3. He argues it has done little to help the economy and poses a risk of doing great harm.

He told the Toronto audience there was a "practical limit" to the size of the Fed's balance sheet and investors shouldn't expect "QE infinity." He later told journalists he had advocated for the Fed to begin slowing the rate of purchases of mortgage-backed securities, but not stop them.

Asked if he was concerned about the impact of rising bond yields on the economy, he said it should be monitored but that policymakers couldn't let markets dictate policy.

"We cannot live in fear that, gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine," he said.

Fisher said he wasn't surprised to see a rise in bond yields given that they are near historically low levels, adding that as a former hedge fund manager he would be cautious. Last week Volcker, who led the U.S. central bank's aggressive battle against inflation, also sounded a warning on QE3, saying that central banks are often too late in removing stimulus.

Fisher on Tuesday didn't repeat his call, made most recently last month, for the central bank to cut back immediately on its $85 billion in monthly bond purchases, though he did reiterate his concerns.
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While chances are "extremely low" that monetary policies will help push inflation above the Fed's 2 percent target this year, the bond-buying program is, "at best, pushing on a string and, at worst, building up kindling for speculation and, eventually, a massive shipboard fire of inflation," he said.

He noted that while there was disinflation in some categories such as food, he wasn't worried as this was emboldening consumers.

Uncertainty about U.S. fiscal policy is keeping businesses from hiring, he added, negating the power of the Fed's super-easy policies. Even so, recent job gains and retail sales suggest the recovery is strong enough "to propel hopes that consumption will help employment growth gradually improve over the long term," Fisher said.

Unemployment is expected to remain at 7.5 percent when the U.S. government releases its May jobs report this Friday.

Bernanke last month said the central bank needs to see further signs of traction before easing up on its monetary stimulus, but also said a decision to do so could be made at one of the Fed's "next few meetings" if the economy looked set to gain momentum.

9 PHOTOS
9 Numbers That'll Tell You How the Economy's Really Doing
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Fed Official: Policymakers May Have to Alter Course
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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