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…
Dallas Fed president Richard Fisher said the Federal Reserve is closer to reducing its large bond-buying program after the unemployment rate fell to 7.4%. He indicated he wants reductions to start later this year, assuming economic momentum doesn’t reverse.
The Fed has been purchasing about US$85 billion a month in long-term securities to keep interest rates low and support hiring and investment. According to Fisher, the Fed now owns roughly 20% of US Treasuries and about 25% of all mortgage-backed securities.
Officials point to the falling unemployment rate — recently 7.4% — and a likely improving labor market. Fed chairman Ben Bernanke has suggested cuts later this year with a view to ending the program by mid-2014 if unemployment reaches around 7%.
When Bernanke outlined the likely timeline for ending purchases, bond yields jumped and stocks fell. Fisher warned that unwinding the program needs to be done gingerly to avoid prompting market turmoil, so reductions could push yields higher and create volatility in stock markets.
Fisher argues that indefinite bond-buying could encourage improper allocation of capital, distort markets and raise concerns about future inflation. He has opposed the program since it began last September for those reasons.
Fed purchases have helped buoy the housing market, in part by buying large amounts of mortgage-backed securities. Fisher noted the Fed now owns about a quarter of all MBS, which is a significant slice of that market.
No. Fed officials have emphasized that ending purchases does not automatically mean higher short-term interest rates. The Fed has pledged to keep rates near zero until the unemployment rate falls to at least 6.5%, provided inflation remains reasonable.
Investors should monitor the unemployment rate and Fed communications for timing of reductions, watch bond yields and stock market reactions (since yields and equities moved when the timeline was discussed), and keep an eye on housing market indicators and inflation readings that could influence Fed decisions.
Call 1300 880 160
Start a chat
Schedule a call
