(Updates with closing market prices in eighth paragraph.)
July 13 (Bloomberg) -- Federal Reserve Bank of Dallas President Richard Fisher said central bank efforts to boost the economy have reached their limits and the U.S. faces a “fiscal reckoning” that only lawmakers can resolve.
“Our great country now finds itself in a very difficult predicament,” Fisher, 62, said today in a speech in Dallas. “Congress can no longer carry on as before, oblivious to the deleterious effect of spending our, and the successor generations’, money with unfunded abandon.”
The regional Fed chief, who votes on policy this year, reiterated his view that the central bank has done enough and he’ll be among the first to advocate tighter policy if prices and inflation expectations rise. Fisher spoke a few hours after Fed Chairman Ben S. Bernanke told Congress that he and his colleagues are prepared to take new action, including buying more government bonds, if the economy appears to be in danger of stalling.
“There may be some things the chairman mentioned this morning -- those are tinkering at the margin,” Fisher told reporters after the speech. “We’ve exhausted our ammunition, in my view” and expanding the Fed’s balance sheet from about $2.7 trillion to more than $3 trillion “might spook the marketplace,” he said.
“I do not personally see the benefit of more monetary accommodation even if the economy weakens further,” Fisher said. “Again, there’s so much liquidity out there, the question is, ‘What is the trigger to put it to work?’”
The bank president’s remarks underscore the division among policy makers on whether further monetary stimulus will be needed if the economy remains weak. A few members of the Federal Open Market Committee indicated that the group might have to consider additional actions if growth stays too slow to “meaningfully” lower unemployment, according to the minutes of their June 21-22 meeting released yesterday. Others suggested that the rising risk of inflation might require the Fed to remove accommodation “sooner than currently anticipated.”
Adding more liquidity “is not the answer” and “now a fiscal reckoning is upon us,” with Congress needing to “develop an entirely new structure of incentives for private businesses and investors,” Fisher said in remarks to the Dallas Rotary Club.
Stocks rallied, halting the worst three-day global slump since March, after Bernanke’s comments, while gold climbed to a record. The MSCI All-Country World Index increased 1.1 percent as of 4:35 p.m. in New York after tumbling 3.4 percent in the previous three sessions. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,317.72 at the 4 p.m. close in New York.
Fed officials had cut their forecasts for growth this year before a July 8 government report showed employers added jobs at the slowest pace in nine months in June. American employers increased payrolls by 18,000 workers, less than the most pessimistic forecast in a Bloomberg News survey of economists, and the unemployment rate unexpectedly climbed to 9.2 percent from 9.1 percent in May.
Fisher said he expects the economy to expand in the second half of this year, with growth rising at an average annual rate of 3 percent to 4 percent. The “temporary influences” of high gas and food prices earlier this year will fade, he said. The U.S. has the potential to expand at more than 3 percent beyond 2011, “assuming the fiscal authorities get it right.”
“At this juncture, I think it sufficient to say that, assuming the people we elect to tax us and spend our money and create the rules and regulations that govern our economic behavior can at long last get their act together,” then there should be “plenty of potential for the economy to move forward at an accelerating clip,” Fisher said.
Federal Reserve Bank of Boston President Eric Rosengren, speaking earlier today in Worcester, Massachusetts, said the outlook for the U.S. economy is for “very slow improvement,” and monetary accommodation is still needed to help spur growth.
--With assistance from Caroline Salas Gage in New York and Jeannine Aversa and Joshua Zumbrun in Washington. Editors: Carlos Torres, Vince Golle
To contact the reporters on this story: Vivien Lou Chen in Dallas at firstname.lastname@example.org
To contact the editor responsible for this story: Christopher Wellisz email@example.com