Tags: Fed | richard | Fisher | US | economy | painful | Choices

Fed’s Fisher: US Faces ‘Painful’ Choices to Avoid Insolvency

Tuesday, 22 Mar 2011 10:50 AM

By Newsmax Wires

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The United States is on a fiscal path towards insolvency and policymakers are at a "tipping point," a Federal Reserve official said on Tuesday.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.

"The short-term negotiations are very important, I look at this as a tipping point."

But he added he was confident in the Americans' ability to take the right decisions and said the country would avoid insolvency.

"I think we are at the beginning of the process and it's going to be very painful," he added.

Fisher earlier said the US economic recovery is gathering momentum, adding that he personally was extremely vigilant on inflation pressures.

Fisher added that the U.S. Federal Reserve had ways to tighten its monetary policy other than interest rates, including by selling Treasurys, changing reserves levels and using time deposits.

But he said the Fed has done its part and should refrain from new accommodative measures, when its asset buying program expires in June.

"The Fed has done enough, if not too much and we should do no more," he said.

“No further accommodation is needed after June,” including by tapering the central bank’s purchases, said Fisher, who votes on monetary policy this year. “Doing so would only prolong the injustice that we have inflicted” on savers through inflation, he said.

The comments by Fisher, who since last year has questioned the Fed’s $600 billion of Treasury purchases, are the first by a policy maker since the central bank’s March 15 meeting in Washington. Officials at the gathering kept the purchase plan in place, while saying the U.S. economy is on “firmer footing.” Fisher said he would have voted against the central bank’s purchase program if he’d had the ability last year.

“I would have voted against QE2, had I had the vote,” the 62-year-old bank president said at the Frankfurt Finance Summit 2011.

The U.S. recovery faces some hurdles, as housing starts plunged last month to the lowest level in almost a year and wholesale prices rose more than forecast, according to economic data released on March 16.

Still, production at U.S. factories increased for a sixth month in February, indicating manufacturing will keep stoking the economy and underscoring the Fed’s view that the expansion is strengthening, according to a Fed report released March 17.

U.S. stocks have gained since the Fed announced its second round of large-scale asset purchases in November, with the Standard & Poor’s 500 Index rising about 8 percent.

Fisher said he is “beginning to see signs of speculative excess” in the U.S., evidenced in the “fresh flow of money” into the stock market, a surge in so-called covenant-lite loans and the re-leveraging by private equity firms.

“There’s lots of liquidity sloshing around the U.S. financial system,” Fisher said. “We are seeing signs of all the intoxication that typically takes place when we have the ambrosia of cheap and readily available capital.”

The central bank purchased $1.7 trillion of mortgage debt and Treasurys through March 2010 to pull the U.S. out of the recession. The $600 billion plan is the Fed’s second round of quantitative easing, also known by economists and investors as “QE2.”

Policy makers have also left the central bank’s benchmark federal funds rate in a range of zero to 0.25 percent since December 2008, and pledged for the past two years to keep it “exceptionally low” for an “extended period.”

“The real question now is, ‘When do we stop accommodation?’” Fisher said to reporters after the speech. “I think we’re getting closer to that period.”

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