Fed’s Fisher raises doubt about how much help central bank can provide to economy

By Jeannine Aversa, AP
Thursday, October 7, 2010

Fed’s Fisher skeptical about more economic aid

WASHINGTON — A Federal Reserve official raised doubts on Thursday that pumping more money into the economy would do much to strengthen the recovery and spur businesses to hire.

Richard Fisher, president of the Federal Reserve Bank of Dallas, is skeptical that businesses would take out new loans to expand or help pay for new workers even if the Fed were to take action to drive down interest rates even more. He suggested that financing problems aren’t the main force holding back companies, but rather, lackluster customer demand.

“While none of us are satisfied with the current pace of economic expansion and job creation, presently it is not clear that conditions warrant further crisis-like deployment of the Fed’s arsenal,” Fisher said in a speech in Minnesota.

The Fed is considering taking action to boost the economy. One likely step is to buy more government bonds to push down rates on mortgages, corporate debt and other loans. Officials are debating how much and how the program should be structured. Despite disagreements within the Fed, many economists think the central bank will take action at its Nov. 2-3 meeting..

During the worst of the recession and financial crisis, the Fed rolled out a massive program to force down interest rates. It bought $1.7 trillion worth of mortgage securities and debt, as well as government bonds. Some Fed officials have suggested that a smaller program — perhaps $100 billion or $500 billion — be launched this time around.

William Dudley, president of the Federal Reserve Bank of New York, has estimated that a $500 billion program would provide the same amount of stimulus as a half-point or three-quarter point reduction to the Fed’s main interest rate. That rate is already near zero and can’t be cut further. That’s why the Fed is mulling other ways to juice up economic growth.

Instead of announcing a set amount of securities to be purchased, the Fed could opt to announce a targeted interest rate for certain government bonds. The Fed would still have to buy bonds to drive down rates to that target.

“There is a great deal of legitimate debate still to take place,” said Fisher. He will participate in the Fed’s policy discussions at the November meeting, but he doesn’t become a voting member of the Fed’s main policymaking group until next year.

An entirely different approach is for the Fed to lift its informal inflation target. The notion there is for the Fed to accept a higher-than- normal rate of inflation. Doing so, would push real,” or inflation-adjusted interest rates, down, which could spur more spending. It’s a controversial idea that Fed Chairman Ben Bernanke called “inappropriate” in August given the country’s current economic circumstances. However, he said such a step “might make sense” if the country were mired in a situation of prolonged deflation that weakened the public’s confidence.

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