ST. ANDREWS, Scotland Policymakers at the Federal Reserve "must keep their heads about them" after a rash of weak economic data and resist simply seeking to solve economic problems with more monetary policy stimulus, a top Fed official said on Tuesday.
Dallas Fed President Richard Fisher, a hawkish policymaker at the central bank, warned that the Fed should not be an "accomplice to the mischief" of fiscal policymakers in Washington who have not done enough to support the stumbling economic recovery.
Among the first Fed officials to weigh in publicly since a report on Friday showed lackluster jobs growth in May, Fisher expressed serious doubts about the efficacy of so-called Operation Twist, which is the central bank's latest plan to boost the recovery.
"I am extremely suspect about the efficacy of Operation Twist," Fisher, who does not have a vote on Fed policy this year, said at St. Andrews University.
Operation Twist, which is set to expire this month, replaces $400 billion of short-term securities in the Fed's portfolio with longer-term ones to lower longer-term rates and stimulate the economy.
Asked directly whether the May jobs report could prompt the central bank to embark on a third round of quantitative easing, or QE3, Fisher said the Fed must be careful not to overreact to economic data. "Short of an implosion, I cannot support further quantitative easing," he said.
Sandra Pianalto, president of the Cleveland Fed bank on Monday was quoted as saying that the grim jobs report for May does not warrant further easing of monetary policy
The Fed in late 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades. Yet the recovery, especially in jobs, has been slow and economic growth has been erratic.
Pressure has intensified on the Fed to take yet more policy action after jobs growth in May was far weaker than expected, with the unemployment rate rising for the first time in nearly a year to 8.2 percent from 8.1 percent in April.
At the same time, employment growth for April and March was revised down, revealing a three-month swoon in the labor market.
But further steps "would represent a form of piling on the already enormous uncertainty and angst that businesses face with our reckless fiscal policy," Fisher said. "To me, that would be the road to perdition for the Federal Reserve."
In the past, Fisher has said the Fed has done enough, and perhaps too much, to stimulate the economy by easing monetary policy. He is in the minority of top Fed officials who, led by Chairman Ben Bernanke, have said they will keep interest rates near zero through late 2014.
Meanwhile, Fed policymakers have warned that Congress must act to avert a "fiscal cliff" at the end of this year in which a series of tax rises and spending cuts are scheduled, threatening a economy that is already vulnerable to the European debt crisis.
"Unless fiscal authorities can structure their affairs to incent the private sector into putting the cheap and ample money the Fed has provided to the economy to work in job creation, monetary policy will prove impotent," Fisher said.
"My point is monetary policy is not the answer - it can only make things worse if this monetizing is repeated."
(Reporting by Philip Baillie; Writing by Jonathan Spicer; Editing by Chizu Nomiyama & Theodore d'Afflisio)