Fed’s Fisher Says U.S. Inflation Expectations Rising

Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s third round of bond purchases will probably fail to create jobs while risking higher inflation.

“I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said yesterday on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction.”

Fisher, who doesn’t vote on monetary policy this year, opposed the Federal Open Market Committee decision last week to expand its holdings of long-term bonds with open-ended purchases of $40 billion of mortgage debt every month in a new round of quantitative easing. The Fed, led by Chairman Ben S. Bernanke, is seeking to boost growth and reduce 8.1 percent unemployment.

“A sustained increase” in inflation expectations “would suggest incipient doubts about our commitment to the Bernanke doctrine of sailing on a course consistent with 2 percent long-term inflation,” Fisher said in a speech in New York.

The five-year, five-year forward break-even rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after the FOMC decided on QE3. That was up half a percentage point from July 26. It dropped to 2.80 percent on Sept. 17.

Congress’s inaction on fiscal policy and excessive government regulation are holding back businesses from spending on hiring and investment, Fisher said in a Bloomberg Television interview. The Fed’s stimulus efforts, or so-called quantitative easing, won’t work because the central bank can’t address those obstacles to growth, he said.

Employment Impact

“I question the efficacy of these large-scale asset purchases,” Fisher said. “What we are doing is not having the impact on employment.”

The U.S. economy is “growing at sub-optimal speed,” though residential real estate has emerged as a bright spot recently, he said.

“As we saw this morning, the housing market is on the move,” Fisher said.

Purchases of existing houses increased 7.8 percent to a 4.82 million annual rate, the most since May 2010, figures from the National Association of Realtors showed yesterday in Washington.

On inflation, “if you look at some of the long-term indicators, it is indicating a little nervousness,” he said. “If you were to see a sustained rise, then I would start to get worried.”

Trader Expectations

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.67 percentage points on Sept. 14, a four-year high.

Some economists, including Nobel Prize winner Paul Krugman, have said tolerating higher inflation could lead to an acceleration in U.S. growth. That position has been echoed by Chicago Fed President Charles Evans, who has called for accommodation as long as unemployment remains above 7 percent and the inflation outlook is under 3 percent.

“I appreciate the arguments made by Mr. Krugman and others,” Fisher said, praising the Princeton University professor’s work on trade. If you allow higher prices, “how credible are you in clawing them back?” he said. “The question is at what point do you lose credibility?”

Current measures of inflation have remained under control and in line with the Fed’s 2 percent target, he said.

‘Immediate Threat’

While “nobody sees an immediate threat of inflation,” Fisher said, “we are going to have to monitor this very closely.”

Stocks halted a two-day drop yesterday as an improving outlook for the housing market bolstered confidence in the U.S. economy. The Standard & Poor’s 500 Index rose by 0.1 percent to 1,461.05.

Fisher has been among the most vocal within the Fed of its decisions to ease policy. He dissented twice last year against moves to push down long-term borrowing costs and to keep the benchmark interest rate near zero until at least mid-2013.