NEW YORK The U.S. economy does not need more liquidity in the form of Federal Reserve bond purchases because it will not induce businesses to borrow, invest and hire, a top Fed official said on Wednesday.
Dallas Fed President Richard Fisher, a policy hawk who opposed the U.S. central bank's decision last week to launch a third round of quantitative easing, or QE3, also warned that the "slightest deviation" from the Fed's 2 percent inflation target could be "debilitating" for financial markets.
Fisher, in remarks prepared for delivery to the Harvard Club of New York City, said his arguments against more accommodation did not convince fellow policymakers at the Fed's meeting last week, after which Chairman Ben Bernanke received broad support from colleagues for buying $40 billion in mortgage-backed securities per month in an effort to boost U.S. employment.
"I felt an urge at the meeting last week to tie the chairman to the mast, Odyssean-style, and to stuff wax in the ears of my fellow committee members, in order to resist the Siren call of further large-scale asset purchases," said Fisher, a former hedge fund manager who in the 1960s was a Navy midshipman.
"But I have no such powers," he said. "I am only one officer in the loyal crew that sails under the command of Admiral Bernanke."
The Fed in late 2008 slashed interest rates to near zero and has since bought some $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 stumbled this year, prompting QE3 and a Fed promise to continue to buy securities until the labor market outlook improves "substantially."
The U.S. economy grew at an annual rate of just 1.7 percent in the second quarter, not enough to put a dent in unemployment, which stood at 8.1 percent last month.
Fed officials believe the bond purchases will boost the housing market, lower longer-term borrowing rates, and push investors into riskier assets such as equities and corporate bonds. That in turn is expected to instill confidence in businesses and individuals, prompting them to hire, spend and invest again.
But Fisher, who does not have a vote on policy this year, repeated his long-standing argument that businesses already have little problem getting financing and are instead uncertain about U.S. fiscal policy and possible spillover from the European debt crisis and from the economic slowdown in China.
"The very people we wish to stoke consumption and final demand by creating jobs and expanding business fixed investment are not responding to our policy initiatives as well as theory might suggest," he said.
(Reporting by Jonathan Spicer; Editing by Leslie Adler)