Fisher Urges Cutting Mortgage Bond Buying to Avoid Disorder

Richard Fisher, president of the Federal Reserve Bank of Dallas, urged the central bank to slow purchases of mortgage-backed securities to avoid disrupting the market.

“When refinancing activity eventually shifts down, the Fed could soon be buying up to 100 percent of MBS issuance if the current purchase program continues,” Fisher said today in remarks prepared for a speech in Houston. “I believe buying such a high share of gross issuance in any security is not only excessive, but also potentially disruptive to the proper functioning of the MBS market.”

The Federal Open Market Committee said May 1 it will keep buying Treasuries and mortgage bonds at a pace of $85 billion a month and would be prepared to increase or reduce the pace in response to changes in the outlook for inflation and the labor market.

Fisher, who opposed the current program and doesn’t vote on monetary policy this year, has been among the Fed officials urging a slowing of asset purchases, or quantitative easing. The Dallas Fed leader said in February he didn’t want to stop “cold turkey” to ensure the transition wasn’t disruptive.

“In my view, the housing market is on a self-sustaining path and does not need the same impetus we have been giving it,” Fisher said to the National Association for Business Economics in Houston. With the success of continued buying “questionable,” he said, “I think we can rightly declare victory on the housing front and reel in -- or dial back -- our purchases, with the aim of eliminating them entirely as the year wears on.”

Housing Market

Fisher said he was encouraged by recent economic data and believes it’s likely growth will exceed private economists’ forecasts of 2.4 percent this year. The housing market is on the rebound, banks are easing lending standards and state and local government cutbacks are no longer a major drag on growth, he said.

The jobs report for April as well as a downward trend in initial claims for unemployment insurance may have signaled an improvement in the labor market as well, the Dallas Fed chief said. Employment picked up more than forecast in April, and the jobless rate unexpectedly declined to a four-year low of 7.5 percent, a Labor Department report showed on May 3. Revisions added a total of 114,000 jobs to the employment count in February and March.

Sales at U.S. retailers unexpectedly advanced in April, Commerce Department figures showed this week. Fisher called the figures “a nice upside surprise.”

Tax Rebates

“This indicates that consumers may have digested delayed tax rebates and the increase in payroll taxes and are reaping the benefits of lower gasoline and food prices,” he said. “So the recovery presently appears to be strong enough to propel hopes that employment growth will continue improving over the near term.”

Inflation reports have been benign, with price measures likely to end the year between 1.5 percent and the Fed’s 2 percent goal, he said.

Labor Department figures today showed the cost of living fell in April for a second month, the first back-to-back declines in inflation since late 2008, as fuel prices retreated. The consumer-price index decreased 0.4 percent, the biggest decrease since December 2008, after falling 0.2 percent in March.

Some Fed officials, including St. Louis Fed President James Bullard, said last month that a further decline in inflation that persisted might warrant additional stimulus. Consumer prices rose 1 percent in March from a year earlier, the lowest level since October 2009, according to the Fed’s preferred gauge of inflation.

Fed’s Goal

Inflation that has “persistently” stayed below the Fed’s goal is a concern and may suggest policy hasn’t done enough to support growth, Boston Fed President Eric Rosengren said today.

“The longer we in the U.S. remain so far below our 2 percent target, the greater the risk that inflation expectations could fall and real interest rates rise,” Rosengren said in the text of prepared remarks delivered in Milan. Low inflation and high unemployment “could lead one to argue that policy has not been sufficiently accommodative.”

Fisher has been president of the Dallas Fed since 2005 and will be a voting member of the FOMC next year. In 2011, he dissented twice against efforts to push down long-term borrowing costs and keep the benchmark interest rate near zero for a prolonged period. He voted in favor of tighter policy five times in 2008.

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