UPDATE 2-Fed's Fisher says don't go 'cold turkey' on QE3

Mon Feb 4, 2013 3:41pm EST

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By Ann Saphir

SAN FRANCISCO Feb 4 (Reuters) - A top U.S. Federal Reserve official who once called a new round of bond-buying stimulus a "Wall Sreet fantasy" on Monday said that he would rather cut back on the Fed's current purchases gradually than stop them outright.

"I don't want to go from wild turkey to cold turkey," Dallas Fed President Richard Fisher said in an interview with Bloomberg Radio. Although the Fed has added much more stimulus than he would have liked, "Now that we are there, I don't think you stop, I think you taper it off."

The U.S. Federal Reserve last week left in place its monthly $85 billion bond-buying stimulus plan, reiterating its pledge to keep up purchases until there is substantial improvement in the labor market outlook.

The program is known as QE3 because it is the Fed's third round of quantitative easing, and Fisher was one its most outspoken opponents before the Fed launched it last September.

Fisher's views are often far wide of the consensus at the Fed, but this time his perspective appears to be more broadly accepted..

Last week St. Louis Federal Reserve President James Bullard said the Fed should slow down rather than suddenly halt those purchases once there is enough improvement in the employment picture.

"I feel the same way," said Fisher, who unlike Bullard does not have a vote on the Fed's policy-setting panel this year. Bullard supported the Fed's decision last month to keep up the bond purchases, although like Fisher he was initially an opponent of QE3.

Atlanta Fed President Dennis Lockhart, who supports QE3, has also said the Fed could taper its bond purchases when the time is right.

Fisher said he is already seeing improvement in the U.S. economy, which he expects will grow about 3 percent this year, but that hiring is still not as robust as he would like, with businesses not taking enough advantage of low borrowing costs.

Unemployment ticked up to 7.9 percent last month, but hiring has improved, with payrolls up an average of 200,000 each month for the past three months.

"I am not worried about price inflation; what I've been worried about is the efficacy of our policy as it affects job creation," he said, reiterating his central criticism of current central bank policy.

"We are always looking at the efficacy of what we do ...If you feel that it is not having as much impact, then you don't want to use the tool any more," he said. "Or, as you approach those goals and things get better, then you reduce the amount of purchases."

Fisher also said he does not believe that any of his colleagues are advocating for no limits to the Fed's bond-buying program.

"No one is arguing it, to my knowledge," even if inflation stays below the Fed's 2-percent inflation goal, he said.

The bond purchases are building up a balance sheet that eventually will need to be trimmed, he warned, adding that it is important that whatever the Fed does today does not tie the hands of a future Fed chairman.

Fed Chairman Ben Bernanke's term ends next year and he is widely expected not to seek reappointment.

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