By Steven Beckner

(MNI) – Far from helping the U.S. economy, Dallas Federal Reserve
Bank President Richard Fisher suggested that additional injections of
money and long-term rate reductions could hurt.

“I have begun to wonder if the monetary accommodation we have
already engineered might even be working in the wrong places…,” he
said. “Far too many of the large corporations I survey that are
committing to fixed investment report that the most effective way to
deploy cheap money raised in the current bond markets or in the form of
loans from banks, beyond buying in stock or expanding dividends, is to
invest it abroad where taxes are lower and governments are more eager to
please.”

Fisher said the Fed must also weigh the cost of further reducing
returns to savers.

“A great many baby boomers or older cohorts…are earning extremely
low nominal and real returns on their savings,” he said. “Further
reductions in rates earned on savings will hardly endear the Fed to this
portion of the population. Moreover, driving down bond yields might
force increased pension contributions from corporations and state and
local governments, decreasing the deployment of monies toward job
maintenance in the public sector.”

“Debasing those savings with even a little more inflation than what
is above minimal levels acceptable to the FOMC is also unlikely to
endear the Fed to these citizens,” he continued. “And…if it were to
prove out that the reduction of long-term rates engendered by Fed policy
had been used to unwittingly underwrite investment and job creation
abroad, then the potential political costs relative to the benefit of
further accommodation will have increased.”

QE made sense in response to the “panic of 2008,” Fisher said, but
“presently it is not clear that conditions warrant further crisis-like
deployment of the Fed’s arsenal.”

“Besides, it would be hard to build a case that the main recipient
of further credit extensions, namely the U.S. Treasury, and borrowers
whose rates are based on historically low spreads over Treasuries have
difficulty accessing the capital markets,” he added.

Yet another cost for the FOMC to weigh, according to Fisher, is the
potential impact of QE2 on already tense currency markets and
international trade relations. As evidence, he cited the Bank of Japan’s
recent announcement that it will make large-scale bond purchases as part
of an effort to restrain the yen from rising against the dollar.

He quoted BOJ Governor Masaaki Shirakawa saying, “If a central bank
tries to seek greater impact from its monetary policy, there is no
choice but to jump into such a world.”

Fisher said such talk “raises the specter of competitive
quantitative easing. Such a race would be something of a one-off from
competitive devaluation of currencies, a beggar-thy-neighbor phenomenon
that always ends in tears.”

Fisher concluded by saying, “Whatever we do with monetary policy
will be of limited utility, if not counterproductive, unless it is
complemented by sensible fiscal policy that restores confidence and puts
the American people back to work.”

(2 of 2)

** Market News International **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]