Bloomberg News

Fed’s Fisher Says Europe Crisis Could Knock U.S. Off Course

December 16, 2011

(Updates with comment on Europe in sixth paragraph.)

Dec. 16 (Bloomberg) -- Federal Reserve Bank of Dallas President Richard Fisher said the U.S. economy remains at risk of disruption by the crisis in Europe and a slowing in global growth, two challenges not easily overcome by Fed policy.

Demand in the economy “has slowly begun to strengthen domestically, yet developments in Europe, a slowdown in growth in emerging economies such as China and Brazil, and concerns about financial trip wires that might be triggered, give rise to caution,” Fisher said today in a speech in Austin, Texas.

The power of Fed policy makers to influence events is limited, Fisher said. “On the foreign front, we are innocent bystanders: There is little we can do but pray that fiscal and monetary authorities abroad get it right,” he said.

Fisher is among the first Fed officials to speak since the central bank’s Dec. 13 policy meeting. The Federal Open Market Committee said after its gathering that the U.S. economy “has been expanding moderately, notwithstanding some apparent slowing in global growth” and that market strains pose “significant downside risks to the economic outlook.”

Fisher, who supported the Fed’s statement, said that “just as we had come to see the light of an evolving domestic recovery, one senses Europe, and possibly the emerging economies, sneaking up behind us.” They may be “poised to knock us off course.”

Fisher told reporters after his speech that Europe’s crisis has “tripwires that might exist in terms of cross exposures with financial institutions.”

One Reason

“That’s one of the reasons we created the swap lines, that I supported,” he said.

On Nov. 30 the Fed cut the cost of emergency dollar funding swap lines as part of a globally coordinated central bank response to ease financial market pressures from Europe’s debt crisis.

Asked if the situation in Europe could require a monetary policy response as well as liquidity measures, Fisher said, “it would depend on whether we had say, a panic, based on a failure, or some specific development that might require a monetary response. I don’t envision one at this juncture.”

U.S. inflation will probably settle below 2 percent, based on the Dallas Fed’s trimmed mean personal consumption expenditures index, Fisher said.

The Dallas index “has been slightly below 2 percent on a six month basis and that’s where I think we’re going with headline inflation,” Fisher said. “Right now let’s get it down to 2 percent, and I think we’re headed in that direction. It might go below that. We’ll see.”

Threat From Slowdown

The global economy also faces a threat from a slowdown in China’s economy, he said.

“The Chinese have not provided convincing proof that they will be able to contain the pricking of their real estate bubble or the shadow banking industry that enabled it,” Fisher said to the Austin Chamber of Commerce. “This has led some to posit that Chinese growth may slow beyond the consensus expectation of China watchers.”

The Dallas Fed chief dissented from the central bank’s decisions in August and September to add additional monetary stimulus. In August the Fed pledged to hold interest rates near zero until at least mid-2013. In September, the central bank said it would sell $400 billion of short-term debt and replace it with longer-term debt, a move known as Operation Twist.

“I’m going to argue against QE3 if it’s put on the table,” Fisher said in response to audience questions, referring to a third round of quantitative easing. That third round has been proposed by some policy makers including Fed governor Daniel Tarullo, who said in an Oct. 20 speech the Fed should consider a new round of large-scale purchases of mortgage backed securities.

Fisher, 62, became president of the Dallas Fed in April 2005. He was deputy U.S. trade representative from 1997 to 2001 under President Bill Clinton and a former Democratic U.S. Senate candidate in Texas.

--Editors: James Tyson, Scott Lanman

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

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


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