Bloomberg News

Fed’s Fisher Sees High Bar to Support Yield Curve ‘Jujitsu’

September 12, 2011

(Updates with inflation comments in fifth paragraph.)

Sept. 12 (Bloomberg) -- Federal Reserve Bank of Dallas President Richard Fisher said he probably won’t support further monetary easing by the Fed, arguing that steps that would boost the recovery are the responsibility of fiscal authorities.

“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 said today in a speech in Dallas. “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.”

Fisher was one of three presidents to dissent from the Fed’s Aug. 9 statement that it expected to hold interest rates near-zero through mid-2013. At its next meeting on Sept. 20-21, the Fed may decide to replace short-term Treasury securities in its $1.65 trillion portfolio with long-term bonds in a bid to lower rates on everything from mortgages to car loans, according to economists at Wells Fargo & Co., T. Rowe Price Associates Inc., Barclay’s Capital Inc. and Goldman Sachs Group Inc.

The plan is sometimes called “Operation Twist” because it would twist the yield curve. Fisher described the move as an attempt to “drive down already historically low nominal intermediate and longer-term rates.” The yield on the 2-year Treasury note was 0.2 percent as of 5:25 p.m. in New York, and the yield on the 10-year Treasury note was 1.95 percent, near the record low close of 1.91 percent reached on Sept. 9.

Voiced Skepticism

Fisher expressed skepticism about a proposal from Chicago Fed President Charles Evans that the central bank be willing to tolerate medium-term inflation just below 3 percent in order to help bring down the unemployment rate.

“Talk about threatening the independence of the Federal Reserve,” Fisher told reporters after his speech, saying he could not imagine trying to explain the policy to unemployed workers.

There is a “difference between theory and practice,” Fisher said. “I understand the theory. I think we also have to consider how severe the backlash would be from those who don’t want their income or meager savings eroded by price increases.”

Uncertainties about tax policy, regulatory policy and the European debt crisis were inhibiting business hiring, he said.

Gas Tanks

“We have filled the gas tanks of the economy with affordable liquidity,” Fisher said at the annual meeting of the National Association for Business Economics. “What is needed now is for employers to confidently step on the pedal and engage the transmission that will use that gas to move the great job- creating machine of America forward.”

The Department of Labor said this month that the U.S. economy created no jobs in August. The unemployment rate remained unchanged at 9.1 percent, the 29th consecutive month of unemployment near 9 percent or higher.

Fisher described the report as “discouraging” and said that “when people are frightened, they understandably look for a ‘fix.’ Yet, my colleagues and I are professionally beholden to beware of short-term fixes that might contradict, or place in jeopardy, the long-term duty and credibility of the central bank,” Fisher told the attendees at the annual conference for economists who work for companies.

“I am wary of adopting any policy that might have the unintended consequence of becoming a veterinary fix rather than a more salutary repairing of the ability to propagate jobs,” he said.

Delay Borrowing

In his speech Fisher echoed an interview today on Bloomberg Television in which he said the central bank’s pledge at its last meeting to keep interest rates near zero until mid-2013 may “actually be an incentive to not borrow.” In his speech, he said that for some businesses, a guarantee of low interest rates for two years would be “an incentive to further delay borrowing for expansion.”

The Dallas Fed chief joined presidents Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis last month in posing the most opposition in almost 19 years to a Federal Open Market Committee decision. The three dissenters preferred instead to maintain a commitment to hold rates low for an unspecified “extended period.”

Fed officials “discussed the range of policy tools” available to boost growth and are “prepared to employ these tools as appropriate,” the FOMC said in its Aug. 9 statement. A few Fed policy makers in August favored more aggressive action to stimulate the economy and lower unemployment, according to minutes of their meeting.

“We must be ever-mindful that the central bank cannot carry the load alone,” Fisher said.

Fisher, 62, has been president of the Dallas Fed since 2005. As a voting member of the FOMC in 2008, he dissented five times in favor of tighter policy.

--Editors: Gail DeGeorge, James Tyson

To contact the reporter on this story: Joshua Zumbrun in Dallas at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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