DALLAS—The US economy is “close to stall speed,” but recent moves by the Federal Reserve to boost growth may not work, Federal Reserve Bank of Dallas President Richard Fisher said on Tuesday. “We seem to be on pause,” Fisher told reporters, referring to the US economy. “I would say we’re getting close to stall speed.”
In a speech to civic group Dallas Assembly, Fisher said he voted against the Fed’s recent efforts to spark greater economic growth because they “are likely to prove ineffective and might well be working against job creation.” The Fed, led by Chairman Ben Bernanke, announced last week that it would buy $400 billion in longer-term Treasury securities by the end of June 2012, while selling an equal amount of shorter-term Treasuries. The move, dubbed “Operation Twist,” was meant to lower long-term interest rates.
Fisher voted against the measure, as did the presidents of the Minneapolis Fed and the Philadelphia Fed. The three also dissented from an August statement, in which the Fed said economic conditions would probably warrant exceptionally low short-term interest rates through mid-2013.
Dennis Lockhart, president of the Atlanta Fed, said on Tuesday Operation Twist is likely to give the economy a small boost. “I think it’s realistic to expect modest positive impact from this program,” he said in a speech in Jacksonville, Florida.
Robert Dye, chief economist at Dallas-based Comerica Bank, described Fisher’s speech as “a breath of fresh air.”
“We’re already at such a low cost of capital that driving rates down a few basis points is not going to make a whole lot of difference,” Dye said.
“There are two key issues: One is shattered consumer and investor and business confidence,” he said. “And there’s this tremendous debilitative drag on the US economy from the housing market.”
Fisher said he backed other measures the Fed adopted last week to support mortgage markets. But he laid out a range of concerns about Operation Twist. The program, he said, could spook people by “signaling the economy is in worse shape than they thought,” leading them to restrain spending.
It also could hurt bank earnings by narrowing the spread between the long-term loan rates banks collect and the short-term deposit rates they pay. And it could force pension funds to reassess their expected returns, requiring them to set aside greater reserves “that might otherwise have gone to investments stimulating job creation,” Fisher said.
An expansion of the Fed’s long-term holdings could lead to losses for the central bank if the economy improves significantly and interest rates rise, he said. That could potentially give policy-makers a “political incentive” to try to keep rates low when they should be raising them.
Fisher said he disagreed with arguments that tolerating a higher inflation rate for a time could spark more spending and investment. He also repeated his calls for Congress and President Barack Obama to seek ways to boost the economy and job creation by changing tax and regulatory policies.
“These actions are not within the Fed’s purview,” he said. “They are the business of Congress and the
president.”
