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Fisher Says Fed Can Begin to Slow Mortgage Security Purchases

Federal Reserve Bank of Dallas President Richard Fisher said the U.S. economy is on better footing and the central bank can begin to taper part of the program that allowed it to recover.

“The question now is: do we now dial that speed of purchases of $85 billion a month, back,” or do we increase it, Fisher said today at a community forum in Nacogdoches, Texas. “The answer to that question depends on the state of the economy. My personal view is that housing has recovered sufficiently so that we can turn down the rate of purchase of mortgage-backed securities.”

Fisher, who doesn’t vote on policy again until 2014, has been among the most vocal supporters of phasing out the Fed’s $40 billion monthly mortgage-backed securities purchases, saying it risks disrupting the market. He said today that the Fed shouldn’t go “cold turkey” and stop the purchases altogether.

“We’re coming out of a massive shock,” Fisher said. “The patient made it through the ER, barely.”

“Now, the question is getting off the table and starting to walk and then- when he will be able to run,” he said. “I don’t think he will be able to run unless he has an incentive to do so.”

The economy will probably be expanding at a 2.5 percent pace at the end of the year, Fisher said.

Fed Chairman Ben S. Bernanke said today that the economy remains hampered by high unemployment and federal government budget cuts, and reducing asset purchases too soon would endanger the recovery.

Fed’s Bernanke

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said today in testimony to the Joint Economic Committee of Congress in Washington. Monetary policy is providing “significant benefits,” he said.

Fed officials are divided on what to do with their so-called quantitative easing program. Federal Reserve Bank of New York President William C. Dudley said yesterday he has not decided whether the Fed’s next move should be to enlarge or shrink it.

Philadelphia Fed President Charles Plosser called for shrinking purchases at the Fed’s next meeting. By contrast, Boston’s Eric Rosengren said low inflation and high unemployment suggest there may be a need for even more stimulus, not less. St. Louis Fed President James Bullard said the central bank should continue its bond buying because it’s the best available option for policy makers to boost growth that is slower than expected.

FOMC Meeting

The Federal Open Market Committee said May 1 it will keep up its monthly purchases of mortgage bonds and Treasuries, and is ready to increase or reduce the pace in response to changes in the outlook for inflation and the labor market.

Quantitative easing helped boost stocks and has pushed mortgage rates close to record lows, fueling housing demand.

The unemployment rate was 7.5 percent in April, and Fed policy makers’ preferred inflation measure, the personal consumption expenditures price index, rose 1 percent for the year ended in March, below their 2 percent goal.

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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