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Fisher Says Fed Near ‘Tipping Point,’ Must Normalize Policy

Federal Reserve Bank of Dallas President Richard Fisher
Federal Reserve Bank of Dallas President Richard Fisher said the central bank faces a significant risk of providing record stimulus for too long and should weigh curtailing its $600 billion bond-purchase plan. Photographer: Jonathan Fickies/Bloomberg

Federal Reserve Bank of Dallas President Richard Fisher said the central bank faces a “significant” risk of providing record stimulus for too long and should weigh curtailing its $600 billion bond-purchase plan.

“We at the Fed are near a tipping point,” the 62-year-old regional bank chief said in a speech today in Dallas. “Just as we pressed on in doing our duty through extraordinary, exigent measures, we must now discipline ourselves to just as persistently normalize our operations in a timely way.”

Policy makers have disagreed over whether to begin removing record stimulus this year, based on the minutes of their most recent meeting on March 15. Fisher, who votes on monetary policy in 2011, is among the Fed officials who have criticized the central bank’s current program of Treasury-securities purchases, scheduled to end in June.

“Having done our job, I see many risks to the Fed overstaying its welcome,” Fisher said during the Society of American Business Editors and Writers 2011 Annual Conference.

Federal Reserve Bank of Atlanta President Dennis Lockhart said today the central bank should take its time in withdrawing stimulus.

“My view of the future permits a degree of patience as regards monetary policy,” Lockhart said in a speech in Knoxville, Tennessee. “There is still a halting and fragile quality to the economy. I think the process of restoration of full economic strength with higher employment continues to require support.”

Labor Market Improving

Economic data over the past month show the U.S. labor market is improving, while service-industries growth has slowed and inflation has increased.

The central bank’s preferred price measure, excluding food and fuel, was up 0.9 percent from a year earlier in February, the most since October, a Commerce Department report showed last month.

“Inflationary impulses are gaining ground in the rest of the world,” Fisher said today. With businesses grappling with higher commodity prices, “my gut tells me that this will result in some unpleasant general price inflation numbers in the next few reporting periods,” and “there is the risk that we might breach our duty to hold inflation at bay.”

The unemployment rate dropped to a two-year low of 8.8 percent in March, from 8.9 percent in February, and payrolls rose by 216,000 workers, the Labor Department said April 1.

Less Than Forecast

Service industries expanded less than forecast in March, a sign that segment of the economy is trailing manufacturing gains, according to the Institute for Supply Management’s index of non-manufacturing companies released April 5.

Fed officials are split over the future path of policy, with a few members of the Federal Open Market Committee leaning toward less-accommodative conditions this year and others noting that “exceptional” accommodation might be needed beyond 2011, according to the minutes released on April 5. The group is set to next meet on April 26-27 in Washington.

“Continued accommodation presents significant risks,” Fisher said. “In my view, no amount of further accommodation by the Fed would be wise,” whether it is adding more purchases or “tapering” the plan to purchase Treasuries beyond June.

“Indeed, it may well be that we should consider curtailing what remains” of the bond-purchase program, he said.

The district bank president told reporters after his speech that he hasn’t made up his mind on how much the Fed should reduce the program. Such a decision would be made by the FOMC, he said.

“We’re there” in terms of the need to end accommodation now, Fisher said, when asked whether he would prefer to wait until June. He added that inflation is “not out of hand yet.”

U.S. stocks swung between gains and losses today as oil rallied to a 30-month high of almost $112 a barrel, triggering rallies in energy shares while dragging down transportation and consumer companies. The S&P 500 declined 0.1 percent to 1,331.55 at 1:20 p.m. in New York after dropping as much as 0.2 percent.

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