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Fisher: Fed's bond-buying program could spark eventual inflation

Federal Reserve Bank of Dallas President Richard Fisher arrives to speak about the concept of breaking up 'too big to fail' banks to a break
Federal Reserve Bank of Dallas President Richard Fisher arrives to speak about the concept of breaking up 'too big to fail' banks to a break

By Ann Saphir

EL PASO, Tex. (Reuters) - The Federal Reserve's massive bond-buying program could spark unwanted inflation unless the U.S. central bank is dexterous in how it pares back easing, a top Fed official who has long opposed the purchases warned on Wednesday.

While so far there are no signs of budding U.S. inflation, the longer term inflationary consequences of the bond purchases "are as yet unclear," Richard Fisher, president of the Federal Reserve Bank of Dallas, said in remarks prepared for delivery at the University of Texas at El Paso.

"Those after-effects will depend on how artful the committee will be in unwinding that accommodation on a timely basis," he said, referring to the Fed's policy-setting Federal Open Market Committee that meets about every six weeks.

Fisher is not a voting member on the panel this year, but does participate in policy meetings and has vocally opposed the Fed's continued efforts to stimulate the economy.

Minutes of the panel's last meeting, on March 19-20, which were released on Wednesday, suggested that policymakers may be preparing to wind down the current bond-buying program, as long as the labor market outlook continued to improve.

Under that program, begun last September, the Fed is purchasing $85 billion of mortgage-backed securities and Treasuries each month.

The buying, along with two prior asset purchase programs, has swollen the Fed's balance sheet to more than $3 trillion, from well under $1 trillion before the 2007-2009 financial crisis.

Still, inflation has remained in check, staying below the Fed's 2 percent inflation target.

There are some signs that the Fed's easing measures have boosted corporate spending and hiring, Fisher said Wednesday.

The Fed has said it will continue to buy bonds until it sees a substantial improvement in the labor market outlook, and will hold short-term borrowing costs near zero until unemployment falls to at least 6.5 percent, as long as inflation remains in check.

Unemployment last month ticked down to 7.6 percent, but only because more people gave up looking for jobs, and it remains high by historical standards, while job growth for March was quite weak.

"It is not yet clear that we will achieve a justifiable bang for the trillions of bucks the Fed has flooded the economy with," Fisher said.

Fisher's speech focused on bragging about the robust Texas economy, which has been outperforming the rest of the nation in job creation since the Great Recession, and on the strength of Mexico's economy under its new political leadership.

El Paso sits on the Mexican border on the western edge of Texas, an hour's flight from Dallas.

Fisher saved a few stinging words for "foreign lands" like Washington, D.C., blaming lawmakers for failing to tackle the nation's fiscal problems, provide certainty on taxes and spending, and craft regulation so that businesses will be moved to hire more workers.

His stinging assessment came just hours after President Barack Obama proposed a $3.77 trillion budget aimed at kick-starting deficit-reduction talks with Republicans, something that drew immediate criticism from both parties.

"The Federal Reserve has provided plenty of, if not too much, high-octane fuel in the form of cheap and abundant money to propel the economy forward," Fisher said, reprising one of his well-worn themes. "We must all pray that our president and our congressional representatives will find a way to reverse their spendthrift ways and do what is right by putting us back on the path of fiscal probity."

(Reporting by Ann Saphir in El Paso, Texas; Editing by Leslie Adler)

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