Dallas Fed chief calls for end to bond purchases
The central bank has been buying $US85 billion ($95 billion) in long-term securities a month in order to keep interest rates low and boost hiring and investment. Fed chairman Ben Bernanke said in June that it would probably make cuts to the program later this year, with an eye to ending it by mid-2014, when unemployment will likely be about 7 per cent.
"With the unemployment rate having come down to 7.4 per cent ... the [Fed's policy-setting] committee is now closer to execution mode, pondering the right time to begin reducing its purchases, assuming there is no intervening reversal in economic momentum in coming months," said Dallas Federal Reserve Bank president Richard Fisher.
He acknowledged that the program had helped buoy the housing market and the stockmarket.
But the idea that the buying would continue indefinitely could encourage improper allocation of capital, Mr Fisher said.
Mr Fisher is among the most hawkish of Fed policymakers, and his views are often at odds with those at the core of the Fed's policy-setting committee. He is not a voter on the committee this year.
Mr Fisher has opposed the bond-buying program since its inception last September, arguing that it has not been very effective. He also said he was concerned the bond-buying could kindle future inflation or distort markets.
The Fed now owns about 20 per cent of US Treasuries and 25 per cent of all mortgage-backed securities, a "significant slice of these critical markets", he said.
When Mr Bernanke laid out the Fed's likely timeline for ending the bond-buying program, bond yields soared and stocks fell.
"When the time comes, we must ... gingerly unwind it so as not to prompt market havoc," Mr Fisher said. To calm markets, Fed officials have emphasised that an end to the bond-buying program did not mean the Fed would raise rates.
Mr Fisher emphasised that point on Monday, noting that the Fed has pledged to keep rates near zero until the unemployment rate falls to at least 6.5 per cent, as long as inflation remains reasonable.
Frequently Asked Questions about this Article…
Richard Fisher said the Fed is closer to reducing its large bond‑buying programme after the unemployment rate fell to 7.4%, and he wants reductions to begin later this year if economic momentum doesn’t reverse. He is a hawkish Fed official who has long opposed the programme.
The Fed has been buying about US$85 billion (reported as US$95 billion) a month in long‑term securities to keep interest rates low and to help boost hiring and investment.
Fed chair Ben Bernanke said cuts would probably begin later this year with an eye to ending the programme by mid‑2014, when unemployment was expected to be around 7 percent; Fisher’s comments reflected that same timeline contingent on steady economic momentum.
When Bernanke outlined the likely timeline for ending purchases, bond yields rose and stocks fell, showing markets can move sharply on signals that quantitative easing may be scaled back.
Fisher warned that ongoing indefinite purchases could encourage improper allocation of capital, distort markets and risk future inflation. He noted the Fed now owns about 20% of US Treasuries and 25% of all mortgage‑backed securities—a significant slice of those markets.
No. Fed officials have stressed that ending the bond‑buying programme does not automatically mean interest rates will be raised. Fisher reiterated the Fed’s pledge to keep rates near zero until unemployment falls to at least 6.5%, provided inflation remains reasonable.
Fisher acknowledged the programme has helped buoy both the housing market and the stock market by lowering long‑term borrowing costs and supporting asset prices.
Fisher said the Fed must 'gingerly unwind' the purchases to avoid prompting market havoc, and Fed officials are emphasising clear communication—such as guidance on interest rates—to calm markets during the transition.
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