WASHINGTON, USA

Richard Fisher, president of the Federal Reserve Bank of Dallas, said he opposed the Fed’s latest attempt to boost economic growth because he fears it won’t work — and it could scare consumers and squeeze bank earnings.

The Fed’s policymaking committee voted 7-3 last week to lower mortgage and other long-term interest rates by reshuffling its US$2.9 trillion investment portfolio. The Fed will shift US$400 billion from short-term to long-term Treasurys through next June.

Fisher was one of the three voting members to oppose the decision. So far, he’s the only one to publicly explain his vote. The other dissenters were Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota.

In a speech in Dallas yesterday, Fisher said the action and other recent Fed moves “are likely to prove ineffective and might well be working against job creation”.

Like Fed Chairman Ben Bernanke, Fisher called on Congress and the White House to do more to stimulate economic growth. Until they “get their act together”, any policies adopted by the Fed “will represent nothing more than pushing on a string.”

Fisher said the move, dubbed Operation Twist, could prove counterproductive. It might signal to consumers that the Fed believes the economy is “in worse shape than they thought” and prompt them to hoard money, Fisher said.

It could also narrow the profits banks earn from the spread between the short-term rates they pay depositors and the longer-term rates they collect on loans.

And the lower rates could force pension funds to set aside extra money to meet their future obligations to retirees — diverting money that might otherwise have gone into investments that would have generated jobs, Fisher said.

Investing more heavily in longer-term Treasurys also poses risks for the Fed. When the economy strengthens, longer-term interest rates will rise, reducing the value of the long-term bonds in the central bank’s portfolio. As a result, the Fed might be tempted to keep rates low just when it should be raising them to keep inflation under control, Fisher said.

Asked if he saw signs of hope for the economy, Fisher cited the example of Texas, where the economy has generally outperformed the nation. He called for limited government and pro-business policies, without offering specifics. Fisher said both major parties shared responsibility for the economy’s troubles. He’s hopeful that lawmakers are starting to take the challenges more seriously.

“Now we’re having a serious discussion, and it’s going to be crude and rough,” Fisher said. “I think we’re getting there, but it’s going to be tough, and we’re going to need leadership to get there.”

AP

FISHER… move could prove counterproductive