DALLAS (Reuters) - There is little the Federal Reserve can do at this point to help a U.S. economic recovery battered by problems at home and abroad, a top Fed official said on Monday, adding that he believes it is it incumbent on politicians to attack fiscal problems.
Richard Fisher, president of the Dallas Federal Reserve Bank, did not outright reject further monetary easing, but he emphasized he remains skeptical that such action would be fruitful.
His comments echoed his own dissent to the U.S. central bank’s decision last month to commit to ultra-low interest rates until at least 2013, a stance driven not by fears of reigniting inflation, but because he did not believe the move would do any good.
“If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it,” Fisher told the National Association of Business Economics on Monday. “But the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary.”
He said uncertainties over the domestic fiscal and regulatory outlook and a reignited European debt crisis have knocked the wind from the U.S. economic recovery.
Fisher, who remains a voting member of the Fed’s policy-setting panel through the end of the year, noted that monetary policy is super-loose already, but businesses are not hiring because the regulatory and tax outlook is too uncertain.
He expressed encouragement, however, that Congress and President Barack Obama are “going at it hammer and tongs” to find a balance between short-term stimulus and long-term fiscal restraint.
Although recent economic data, such as the government report showing the U.S. economy added no jobs August, has been “discouraging,” he said, it is misguided to look to the U.S. central bank for a “fix,” when most of the problems stem from issues beyond its control.
The Fed has kept interest rates near zero since December 2008 and has bought $2.3 trillion in long-term securities to give the economy an added boost.
Inflation should gravitate toward 2 percent in coming months, Fisher said.
Worries over the European debt crisis are also hurting the U.S. and global economy, but resolving those problems are beyond the Fed’s writ, he said.
Those woes have spurred purchases of Treasuries, seen as relatively safer assets, pushing down long-term borrowing costs and “doing some of the work for us,” Fisher said.
“We don’t want to be helped at the expense of our largest trading partner,” he said, referring to Europe.
The Fed’s policy-setting panel meets next week to discuss possible actions to further boost the economy. One widely discussed option is to replace some of the Fed’s short-term securities with longer-maturity assets to push down borrowing costs.
Fisher listed this and other options in his speech, while parenthetically critiquing their effectiveness.
Speaking to reporters after the event, Fisher said a proposal for the Fed to tolerate temporarily higher inflation to heal some of the economy’s wounds would spur a “severe backlash” against the Fed, threatening its independence.
Chicago Fed President Charles Evans and some prominent economists like Kenneth Rogoff have embraced the idea, saying it could help bring down unemployment and ease household debt burdens.
The best the Fed can do, Fisher suggested, is to work to reduce regulatory burdens that keep credit from flowing to small businesses.
“We must be ever-mindful that the central bank cannot carry the load alone,” Fisher said. “Indeed, there is great danger in any temptation to do so.”
Fisher, who was one of three policy-makers to dissent in the Fed’s decision last month, predicted there will be more dissents, given the enormity of the economic problems and the limits of Fed policy tools.
Reporting by Ann Saphir, Editing by Leslie Adler