The US economic recovery is gathering speed as business activity picks up pace, despite lingering weakness in employment, Dallas Federal Reserve Bank President Richard Fisher said on Tuesday.
In an unusually detailed account of information obtained from industry contacts, Fisher cited improvements in areas ranging from shipping to retail, arguing the nation's economic rebound was on a solid, sustainable path.
The remarks suggested Fisher, a self-proclaimed inflation hawk whose tone had become rather dovish in recent months, was warming up to the idea of removing some of the heavy monetary accommodation applied by the Fed to the worst financial crisis since the Great Depression.
“Taken together, anecdotal evidence indicates that, absent some exogenous shock, the recovery that began last summer is unlikely to be reversed and will instead proceed, slowly gathering momentum as we progress through the year,” said Fisher, who reiterated his forecast US gross domestic product would expand around 3% in 2010.
“It is less than we had grown accustomed to in the heyday before the crisis, and it may not result in as rapid a reduction in unemployment as we would like. But it is positive and noteworthy,” Fisher told a conference sponsored by the University of Arizona's Eller College of Management.
Fisher said he was not advocating an increase in interest rates just yet, nor any sales of assets. But he added that the Fed has the tools it needs to remove monetary stimulus when the time is right.
Fisher is not a voter in the central bank's policy-setting Federal Open Market Committee this year, but he does take part in the deliberations, which are undertaken 10 times annually.
Fisher, a former hedge fund manager, said a return to healthier credit markets had enabled the Fed to pull the plug on most of its emergency liquidity facilities. As for the long-term monetary accommodation undertaken in the form of outright debt purchases, Fisher said the Fed was looking for ways to sell such assets in an orderly fashion.
“We are now focused on restoring our balance sheet to a more normal configuration,” Fisher said, adding that the central bank would like to return to the days when most of its holdings consisted of Treasury bonds, rather than mortgage debt. “The disposition of those assets and liabilities will depend on the course of the economy.”
Such talk could be interpreted as laying the groundwork for what is expected to be the opening salvo of the Fed's monetary tightening campaign: the removal from the central bank's policy statement of a commitment to keep interest rates at “exceptionally low levels for an extended period.”
Fisher's remarks were not at all hawkish. He did emphasize the ongoing troubles of the labor market, where a 9.7% unemployment rate remains uncomfortably close to double-digits. This, together with an absence of price pressures, suggests there is still plenty of slack in the economy, he said.
But overall, Fisher's tone was distinctively more sanguine on growth.
NO MORE MBS BUYING
In response to the most severe financial crisis in generations, the Fed chopped interest rates down to nearly zero and undertook a host of unconventional measures to boost market liquidity and drive borrowing costs lower still. These included a myriad of emergency lending facilities to specific impaired markets, such as commercial paper. It also involved over $1.7 trillion in direct purchases of both mortgage-linked debt and Treasury bonds.
With the end of the Fed's mortgage-backed securities (MBS) buying program the central bank must sell those assets back to the market, but it is not yet time to do so, Fisher said.
It is unlikely the Fed will have to step back into markets to buy MBS, even though rates on residential home loans are rising, he told reporters.
A recent spike in Treasury yields - a benchmark for mortgage rates - was probably due in part to fears about rising US government fiscal deficits expected to reach some $1.4 trillion this year, Fisher said. Ten-year note rates, a key benchmark in private lending markets, have risen 0.30 of a percentage point in less than two months to 3.86%.
“We cannot turn a blind eye to the effect that growing government indebtedness has on investors' confidence and Treasury yields,” he said.
He added that the Fed would not come to the government's rescue by making additional purchases of Treasury debt if bond yields continue their upward march.
“Should we do so, we would only become an accomplice to the fiscal incontinence of Congress,” he said. (Reuters)