Fed's Fisher: Central Bank Risks 'Staying Too Loose, Too Long'

Tuesday, 29 Jul 2014 09:56 AM

By Dan Weil

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Dallas Federal Reserve Bank President Richard Fisher, one of the Fed's inflation hawks, is concerned that the Fed's massive easing program is causing more harm than good.

The central bank has kept the federal funds rate target at a record low of zero to 0.25 percent since December 2008. And its balance sheet has ballooned to $4.4 trillion through more than six years of quantitative easing.

The result: "we are experiencing financial excess that is of our own making," Fisher writes in The Wall Street Journal.

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While some Fed policymakers say it can use its regulatory power to prevent a financial crisis, that power "can be circumvented," Fisher says. "Relying upon it to prevent financial instability provides an artificial sense of confidence."

The problem doesn't end there, Fisher says. "I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose, too long," he writes.

The Fed should consider shrinking its balance sheet as soon as this fall and raising interest rates early next year or sooner depending on the economy's strength, Fisher says.

Meanwhile, Jeremy Grantham, founder of money manager GMO, criticizes Fed Chair Janet Yellen for what he says are signals that she won't raise interest rates to fight bubbles in financial markets.

"She will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear," he writes in the firm's quarterly commentary.

"History is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause."

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