Fed’s Fisher May Prefer Treasury Sales to Begin Tightening

Federal Reserve Bank of Dallas President Richard W. Fisher
Federal Reserve Bank of Dallas President Richard W. Fisher. Photographer: Jonathan Fickies/Bloomberg

Federal Reserve Bank of Dallas President Richard W. Fisher said he’ll be among the first policy makers to push for tighter policy as the economy improves and that one possible first step may be the sale of some of the central bank’s Treasury securities.

“One could make an argument that the most logical thing to do is to undo what you did last,” the regional bank chief, who votes on monetary policy this year, said in an interview yesterday in Dallas. “Markets for Treasuries are very deep and very liquid -- that gives you a lot of maneuvering room,” he said, adding he’s not yet committed to one strategy.

The Fed has become the single leading owner of U.S. government securities, and Fisher noted that its holdings of Treasuries have more than doubled as a share of its total assets over the past two years, to 46 percent. Fisher has questioned the Fed’s decision in November to undertake a second round of Treasury purchases totaling $600 billion through June and has said in interviews this month that he’s unlikely to support further stimulus.

“The question is, ‘When do you reverse gears?’” said Fisher, 61, one of four regional Fed presidents who rotated into voting slots this year. “It’s not clear yet. But I suspect, given my proclivities, I will be ahead of the curve of consensus in terms of shifting gears.”

Fisher said central bankers have the will and the means to tighten policy when the time is right.

“There’s no difference amongst us of wanting to respond in a timely way,” he said. “It’s going to be a judgmental issue as to when that time is appropriate. Do we have the capacity to do so? Yes, we do.”

Near Zero

The central bank has held the target for the federal funds rate near zero for two years and purchased $1.7 trillion of mortgage debt and Treasuries through March 2010 to pull the U.S. out of the recession. At the Fed’s most recent meeting in January, Fisher voted along with the majority of the Federal Open Market Committee to push forward with the second round of purchases.

Fisher called the latest round of purchases a “fait accompli” decided upon by a majority of the FOMC last year, and said he doesn’t expect the central bank to incur large losses on its holdings.

“We’ve done a lot of sensitivity analysis on that portfolio,” he said. “Given the coupons, given the structure and duration of our portfolio, it’s very hard to envision a scenario in which we incur sustainable capital losses.”

Chairman Ben S. Bernanke, in congressional testimony last February, outlined the Fed’s thinking on reversing its record expansion of credit, without citing a timetable. He identified an increase in the interest rate paid on reserves as one option, and said he didn’t expect selling any securities “at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery.”

Firmer U.S. Recovery

Data released this month point to a firmer U.S. recovery. Consumer confidence rose in February to the highest level in eight months, according to the Thomson Reuters/University of Michigan preliminary index of consumer sentiment.

The number of Americans filing first-time claims for unemployment insurance in the week ended Feb. 4 fell to the lowest level since July 2008.

Also, manufacturing unexpectedly accelerated in January at the fastest pace in more than six years, according to the Institute for Supply Management.

The risk of a double-dip recession “has receded beyond the rearview mirror” and the possibility of deflation has “become a very, very small tail risk,” Fisher said.

“Inflation is still a tail risk,” with “significant price increases in inputs of commodities and imported goods,” and is “something to be vigilant about,” he said.

Likely to Grow

The U.S. economy will probably grow 3 percent to 4 percent this year, with unemployment remaining above 8 percent, Fisher said. He sees 1.5 percent as a “reasonable level of price stability” over the long term.

Stocks have gained since the Fed’s Nov. 3 decision, with the Standard & Poor’s 500 Index climbing 5.6 percent this year. The yield on 10-year Treasuries has risen to 3.60 percent from 2.57 percent on Nov. 3, the day the Fed announced the second round of bond purchases. Bernanke has attributed the rising interest rates to signs of an improving economy.

The world’s largest economy expanded in the fourth quarter of 2010 at a 3.2 percent annual rate, according to Commerce Department figures released on Jan. 28, and by 2.9 percent for all of last year. It’s forecast to grow by 3.2 percent this year and 3.3 percent in 2012, the median estimates of economists surveyed by Bloomberg News this month.

Fed Statement

The expansion isn’t enough to “bring about a significant improvement in labor market conditions,” the Federal Open Market Committee said after its two-day meeting ended on Jan. 26.

The U.S. jobless rate, at 9 percent as of January, has remained at or above that level for 21 straight months. Employers added just 36,000 workers in January, short of the 146,000 median gain projected by economists in a Bloomberg News survey, in part because of winter snowstorms.

Referring to the Fed’s dual objectives, Fisher said, “I am of the strong personal belief you cannot have sustained full employment unless you make sure inflation is kept under control. So in terms of priority, personally, my focus is on price stability.”

The last time Fisher was a voting member of the FOMC in 2008, he dissented five times in favor of tighter policy. He has led the Dallas Fed since 2005.

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