UPDATE 1-Fed's Fisher sees 'overkill' risk in mortage-bond buys

Wed Feb 27, 2013 4:50pm EST

By Jonathan Spicer

NEW YORK Feb 27 (Reuters) - The Federal Reserve risks "overkill" if it continues buying mortgage bonds at the current clip because the U.S. housing market is on sounder footing, a top Fed official said on Wednesday.

In a speech, Federal Reserve Bank of Dallas President Richard Fisher repeated his preference for the U.S. central bank to taper its $40 billion in purchases of monthly mortgage-backed securities.

The Fed is also buying $45 billion in Treasury bonds per month as part of its unprecedented drive to spur investing and hiring, and to help along the slow and erratic U.S. recovery from the 2007-09 recession.

Fisher, an outspoken inflation hawk whose views are in the minority among his fellow 18 Fed policymakers, pointed to a "reinvigorated housing market" as a source of concern over the extraordinary measures employed by the central bank, including its quantitative easing program.

"The fact that the housing-market gears have now begun to mesh is why I believe we are running the risk of overkill by continuing our mortgage-backed securities purchase program at the current pace, and would suggest tapering off those purchases," Fisher told students and faculty at Columbia University.

He added, however, that U.S. unemployment remains "annoyingly high" at 7.9 percent last month, and that private-sector job-creation has been less enthusiastic than desired.

Chairman Ben Bernanke and most other Fed policymakers are eager to act given the high jobless rate and the fact that inflation is below their 2 percent target, and they do not want to derail a recovery that has faltered in each of the last three years. A weak global economy, higher U.S. taxes, and possibly sharp government spending cuts that could kick in starting next week all pose risks.

MARKET DISTORTIONS

Still, the central bank is increasingly worried that the ultra-easy policies are setting the stage for a run-up in inflation or balance-sheet losses down the road.

Fisher highlighted a third key concern: the massive bond buying could distort markets and cause bubbles in hard-to-detect areas.

"Credit is super-abundant and stock market behavior is conditioned not so much by the fundamental performance of its underlying companies but by increasing doses of monetary Ritalin," Fisher said.

U.S. stocks are near record highs. On Wednesday, all three major indexes rose more than 1 percent, and the S&P 500 posted its best daily percentage gain since Jan. 2, in part due to Bernanke's testimony to Congress in which he defended the accommodative policies.

Citing the uncertain market backdrop, Fisher said he is not surprised that businesses have chosen not to hire but to buy back shares, pay out dividends or to make acquisitions.

Turning to the topic of his home state, the policymaker suggested that Texas should take advantage of historically low interest rates to borrow for the next 100 years.

"Might it make sense for Texas to issue ultra-long bonds at currently prevailing ultra-low rates to finance the state's longer-term infrastructure needs?" Fisher asked. "I have in mind a Texas Century Bond. ... If ever there were a window for such an issuance, it surely would be now."

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article