–Without Fiscal,Regulatory Action, QE Will Lead to Speculation,Infl
–Unlikely QE Will Lead to Job Creation, Demand-Spurring Behavior

By Heather Scott

WASHINGTON (MNI) – Dallas Federal Reserve Bank President Richard
Fisher warned Monday that without rapid action on fiscal and regulatory
policy by the Congress and the administration, quantitative easing
simply monetizes the national debt and will lead to speculation and
inflation.

Fisher argued that the new round of quantitative easing announced
last week can be seen as a “bridge loan to fiscal sanity,” but warned
that he believes this is the “wrong medicine” for the problems facing
the U.S. economy.

In a speech prepared for the Association for Financial
Professionals in San Antonio, Fisher recapped his strident argument
against the step in last week’s Federal Open Market Committee meeting.
He is not currently a voting member of the committee, but will be as of
the January 25-26 policy meeting.

“The new leadership of the House of Representatives, and the
reelected leadership of the reshaped Senate, together with President
Obama, surely must understand that we are at the end of the line and
that time is of the essence,” Fisher said. “The Fed is doing its level
best to deliver on the dual mandate it was given by the Congress. But
monetary accommodation, by itself, is not the answer to our current
woes.

“The Fed, as I see it, has taken a leap of faith that our political
leaders will forge a sensible budgetary and regulatory path that
incentivizes businesses to put to work the money the Fed is printing to
invest in creating jobs for American workers … . We need for the
Congress to move quickly, beginning in its lame-duck session,” he urged.

“Otherwise, the effect of quantitative easing will, in my view,
simply result in financial speculation, further investment in more
welcoming quarters abroad and, ultimately, in ‘super ordinary’
inflation. The FOMC is taking a calculated risk,” Fisher cautioned. “If
the Congress and the Executive fail to deliver, I believe the FOMC will
have to consider changing course.

“Here is the message: The Fed is going out of its way to be a good
citizen. It is time for the Congress to do the same.”

While praising Fed Chair Ben Bernanke for his “adroit leadership”
in the 2008-2009 panic, with liquidity steps that avoided the mistakes
of the 1930s, Fisher disputed the argument that current conditions again
call for another injection of liquidity.

Businesses, in fact, are “floating on a sea of liquidity” but the
funds are being used to increase productivity, shore up balance sheets,
or make investments abroad, not to increase hiring of American workers.

And, he cautioned, “We are already seeing the beginnings of
speculative activity in stocks, bonds, buyouts and commodity markets.”

Fisher warned this could eventually hinder the Fed’s independence.

There is “considerable risk, in conducting monetary policy that has
the consequence of transferring income from the poor and the worker and
the saver to the rich,” he said.

“I know of no presidential administration or Congress, Republican
or Democrat, that will tolerate, let alone advocate for, that dynamic
for long, and I expressed my worry that this could come back to bite us
and possibly threaten our independence,” he said.

While quantitative easing would be justified in the event of clear
deflation, Fisher argued that the evidence is lacking. Instead, he said,
“The underlying trend in inflation appears, for the time being, to be
holding steady.”

And, he said, “while nominal growth is less than desired and is
very painful, nominal income is growing, however incrementally, not
shrinking.”

Fisher also warned about the consequences of a weaker dollar amid
the increased liquidity. Since it might make exports more competitive,
it would raise the price of imports, a “not insignificant portion” of
which are purchased by lower-income earners.

Weakening the dollar also “might undermine our standing in
international fora,” he said, without mentioning the Group of 20 leaders
summit this week in Seoul, where currencies and Fed policy are sure to
be a central focus of discussions.

Noting his past life as a deputy U.S. trade representative, Fisher
cautioned that “might undermine efforts to ward off protectionism.”

While he said he respects the will of the FOMC, he summed up his
fears for the policy step:

“The remedy for what ails the economy is, in my view, in the hands
of the fiscal and regulatory authorities, not the Fed. I could not state
with conviction that purchasing another several hundred billion dollars
of Treasuries … would lead to job creation and final-demand-spurring
behavior. But I could envision such action would lead to a declining
dollar, encourage further speculation, provoke commodity hoarding,
accelerate the transfer of wealth from the deliberate saver and the
unfortunate, and possibly place at risk the stature and independence of
the Fed.”

** Market News International Washington Bureau: 202-371-2121 **

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