By Steven K. Beckner

NEW YORK CITY (MNI) – Dallas Federal Reserve Bank President Richard
Fisher expressed strong doubts about the efficacy of the Fed’s latest
monetary stimulus measures Wednesday night, though he expressed the hope
that purchases of mortgage-backed securities “may aid housing.”

Noting that the Fed has already created huge amounts of bank
reserves, Fisher said the third round of asset purchases (“quantitative
easing”) approved by the Fed’s policymaking Federal Open Market
Committee last week are unlikely to induce more borrowing, spending,
hiring or investing.

Until there is an end to uncertainty about U.S. fiscal policy and
about economic conditions in China and Europe, he said firms are
unlikely to expand payrolls or production, no matter how much money the
Fed pumps into the U.S. economy, he contended.

With its decision to launch “QE3″ to lower long-term interest rates
and to extend the period of zero short-term rates another six months to
mid-2015, the FOMC is “sailing deeper into uncharted waters,” said the
former U.S. Naval Academy midshipment.

And no one knows how to “successfully navigate” out of those
waters, i.e. exit from its $2.8 trillion and growing balance sheet, he
warned in remarks prepared for delivery to the Harvard Club of New York
City.

Fisher expressed concern about the rise in inflation expectations
which he said has occurred since the FOMC announced its open-ended $40
billion per month MBS purchases. He warned of “mal de mer” (bad seas) if
the public and the markets perceive the Fed has made “even the slightest
deviation” from its 2% inflation target.

Fisher, who dissented three times against easing measures as an
FOMC voter last year, did make one concession to the FOMC’s latest
effort at monetary stimulus.

“Even though I am skeptical about the efficacy of large-scale asset
purchases, I understand the logic of concentrating on MBS,” he said.
“The program could help offset some of the drag from higher
government-sponsored entities’ fees that have been recently levied, will
likely lower the spreads between MBS and Treasuries and should put
further juice behind the housing market — one of three durable-goods
sectors that is assisting the recovery and yet is operating well below
long-run potential (the other two sectors are aircraft and
automobiles).”

“The general effects of inducing more refinancing may aid housing
and households in other ways,” he continued. “Lower mortgage rates could
help improve the discretionary spending power of some homeowners.”

“Underwater homeowners might have added incentive to continue
meeting mortgage payments, spurring demand and preventing underwater
mortgages from sinking the emerging housing recovery,” he went on.
“Despite my doubts about its efficacy, I pray this latest initiative
will work.”

Fisher noted that, since the FOMC announced the MBS purchases,
interest rates on 30-year mortgage commitments have fallen about
one-quarter percentage point.

But he said the impact of the MBS purchases will depend heavily on
“the transmission mechanism for mortgages.”

Fisher, continuing his nautical analogy, said he argued against the
Fed doing more at the FOMC meeting because “our engine room is already
flush with $1.6 trillion in excess private bank reserves owned by the
banking sector and held by the 12 Federal Reserve Banks.”

“Trillions more are sitting on the sidelines in corporate coffers,”
he said. “On top of all that, a significant amount of underemployed cash
— or fuel for investment — is burning a hole in the pockets of money
market funds and other nondepository financial operators.”

So “why would the Fed provision to shovel billions in additional
liquidity into the economy’s boiler when so much is presently lying
fallow?” he asked.

Fisher said “the very people we wish to stoke consumption and final
demand by creating jobs and expanding business fixed investment are not
responding to our policy initiatives as well as theory might suggest.”

He cited a National Federation of Independent Business survey
showing that 9 of 10 businesses either are not interested in borrowing
or have no problem getting cheap financing and that a 25 basis point
decrease in interest rates would not lead them to borrow more.

Fisher quoted one CEO as saying, “anything further monetary
accommodation induces in the form of cheaper capital will go to buying
back our stock.”

Business executives may not be “sophisticated” economic theorists
like some members of the FOMC, he said, but they understand that “you
cannot have consumption and growth in final demand without income
growth; you cannot grow income without job creation; you cannot create
jobs unless those who have the capacity to hire people-private sector
employers-go out and hire.”

Fisher pointed out that one top theorist and former colleague of
Fed Chairman Ben Bernanke — Columbia University Professor Michael
Woodford — questioned the effectiveness of asset purchases in a paper
at the Kansas City Fed’s recent Jackson Hole symposium.

As he has done before in colorful terms, Fisher once again pointed
the finger at the fiscal authorities.

The same Congress that gave the Fed a dual mandate to pursue
maximum employment with price stability “is doing nothing to motivate
business to expand and put people back to work,” he said. “The
responsibility for stimulating economic growth must be shared with
fiscal policy. Ironically, and sadly, Congress is doing nothing to
incent job creators to use the copious liquidity the Federal Reserve has
provided.”

“Indeed, it is doing everything to discourage job creation,” he
added.

The fiscal authorities “fight, bicker and do nothing but sail about
aimlessly, debauching the nation’s income statement and balance sheet
with spending programs they never figure out how to finance,” Fisher
charged.

** MNI New York Newsroom: 212-669-6430 **

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