Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s third round of large-scale asset purchases has led to an increase in market expectations for higher inflation without more job creation.
“I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said 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 securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing. The Fed is seeking to boost growth and reduce 8.1 percent unemployment.
Measures of expected future inflation “have ramped up pretty quickly,” Fisher said. The five-year, five-year forward breakeven 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.
Congress’s inaction on fiscal policy and excessive government regulation are holding back businesses from spending on hiring and investment, Fisher said in a later 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.
“I question the efficacy of these large-scale asset purchases,” Fisher said. “What we are doing is not having the impact on employment.”
“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.”
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.
While “nobody sees an immediate threat of inflation,” Fisher said, “we are going to have to monitor this very closely.”
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.
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