Markets may be wary of the Federal Reserve slowing down its $85 billion-a-month bond-buying program in the months ahead — the much-anticipated “taper” — but Dallas Fed President Richard Fisher isn’t. In a colorful speech Monday, Fisher warned that the Fed’s balance sheet has expanded to $3.5 trillion, or $11,300 for every U.S. man, woman and child, and called it a “Gordian Knot” that needs to be untied quickly and carefully before inflation takes hold.
Fisher, known as one of the more hawkish of the central bank’s top officials, cautioned that excess bank reserves and business cash holdings generated by the Fed’s attempts to ease monetary conditions “could prove the kindling of an inflationary conflagration” unless the Fed is “nimble” in winding down its stimulus measures.
What will make that process difficult, Fisher said, is that the central bank holds huge numbers of long-term securities that could prove hard to trade when the time comes. The Fed now holds about 20 percent of all Treasury bonds and buys more mortgage-backed securities each month than are issued.
Fisher called this state of affairs a “Gordian Knot,” a reference to a legend involving Alexander the Great slicing through a massive knot that others had failed to untie, and included this chart in his presentation:
Placing himself in the camp of those who favor a Fed taper as early as September, Fisher said the way for the Fed to begin unwinding its Gordian Knot is to stop purchasing new assets. The Fed is scheduled to meet in September and October, and many analysts expect the monetary policy committee to announce that it will dial back its bond purchases in September, when Chairman Ben Bernanke is slated to address the press.
Fisher, who has been president of Dallas Fed since 2005, is not a voting member of the Fed’s monetary policy committee, but will be in 2014. Nevertheless, all presidents of regional Fed banks participate in the monetary policy meetings in Washington, and Fisher indicated that he has pushed for an earlier exit from stimulus during the conferences. Other Fed officials have suggested that they should wait until clear improvement in certain economic indicators before scaling back the purchases. Both sides, however, have emphasized that the Fed will keep interest rates below zero until well after the stimulus purchases are wound down.
Fisher placed the blame for recent slow U.S. economic growth on Congress and the White House, ripping “fiscal management that seems incapable of providing job creators with tax, spending and regulatory incentives,” and that the limited success America has enjoyed in recovering from the recession “has been despite the fiscal and regulatory authorities.”
If Congress and President Obama “would just let ‘em rip,” Fisher said of U.S. businesses, “we would have an economy that would soar.”