Richard Fisher: Fed Can’t Offset Treasury-Borrowing Flood

June 15 (Bloomberg) — The Federal Reserve isn’t capable of offsetting the “flood” of U.S. Treasury borrowing with its bond-purchase program, which is helping to revive credit markets, Dallas district-bank President Richard Fisher said.

“The program has had its impact,” Fisher said today in an interview with Bloomberg Television. “At the same time, you cannot counter this enormous flood” of borrowing “coming from the United States Treasury.”

The Fed’s efforts to stimulate the economy are complicated by rising Treasury yields, which push up the cost of mortgages even after policy makers have lowered short-term interest rates near zero. Fed district bank presidents including Janet Yellen of San Francisco, Dennis Lockhart of Atlanta and Thomas Hoenig of Kansas City are among those who say higher yields may reflect concerns about inflation and imbalances such as the budget deficit.

The Fed won’t “monetize” the fiscal deficit by effectively printing money to finance the shortfall, and there’s been no “pressure” from the Obama administration to do so, said the Dallas bank chief, who doesn’t vote on rates this year. Fisher, 60, also dismissed the concerns of some central bank watchers that its record purchases of assets will cause inflation to soar.

Policy makers are “constantly aware” of the need to consider an exit strategy from their unprecedented emergency initiatives during the crisis, and will end the programs at an appropriate time, he said. “We have to apply our judgment. There’s nothing that tells us how to do this.”

Reduce Holdings

Treasury 10-year note yields reached 4 percent last week for the first time since October on concern budget deficits and a falling dollar will lead investors to reduce holdings of U.S. debt. The yield on the U.S. 10-year note fell seven basis points to 3.72 percent at 3:45 p.m. in New York, according to BGCantor Market Data.

The deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Policy makers aren’t likely to raise the benchmark interest rate in the “immediate future,” Fisher said before the FOMC gathers next week in Washington. He added that he isn’t inclined to “pay a lot of attention” to trading in federal funds futures, which show some investors are betting on a rate increase by the end of the year.

Hawkish Official

Fisher, who describes himself as among the most hawkish members of the Federal Open Market Committee on inflation risks, said it’s inappropriate to be a “screeching hawk” on price pressures now because of the amount of “slack” in the economy. He said he isn’t surprised by rising yields and reiterated his position that deflation, or an extended and broad decline in prices, is a greater risk than inflation.

“Long term, we all know inflation is a monetary problem, and you could have inflationary pressures,” he said. Still, “that is not the issue right now.”

In an interview with CNBC earlier today, St. Louis Fed bank president James Bullard said he’s “optimistic” the U.S. economy will rebound in the second half, barring further “shocks.”

“One of the things about when the economy is down, is you are sort of vulnerable to further shocks that you don’t maybe anticipate at this point,” Bullard said. “But barring that we’ll get some positive growth in the second half of the year.”

To contact the reporters on this story: Vivien Lou Chen in San Francisco at [email protected]; Kathleen Hays in New York at [email protected]

Last Updated: June 15, 2009 16:02 EDT
By Vivien Lou Chen and Kathleen Hays

Source: The Federal Reserve

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