GAINESVILLE, Texas The U.S. Federal Reserve's bond-buying programs alone cannot bring down too-high unemployment, because there is too much uncertainty holding businesses back from hiring, a top Fed official said on Tuesday.
"Quantitative easing is a necessary but insufficient tool to spark job creation," Dallas Fed President Richard Fisher said at the Gainesville Area Chamber of Commerce. "Employers will not deploy the cheap and abundant capital on hand toward job creation while there is so much uncertainty surrounding final demand for the goods and services they sell."
Businesses are also holding back because of uncertainty over the so-called fiscal cliff, he said, because they do not know what their taxes will be or how government spending patterns will affect them.
Fisher compared U.S. businesses, with access to liquidity provided by an accommodative Fed, to a 2,200-pound bull named Too Big to Fail that lives on Fisher's East Texas farm and whose job is to breed the farm's Longhorn cows.
"Too Big has plenty of liquidity at his disposal; he's fully equipped to do what we pay him to do," Fisher said. "But if we put him on the opposite side of the fence from those pretty cows, he's unable to perform."
"All the monetary accommodation we've made possible... will not be used unless we get clarity and a reduction of uncertainty through a resolution of the fiscal cliff," Fisher said.
The Fed last Wednesday said it would keep interest rates near zero until unemployment -- now at 7.7 percent -- fell at least to 6.5 percent, as long as inflation does not rise above 2.5 percent. It was the first time the Fed had picked a specific marker for unemployment to guide policy.
It also said it would buy $45 billion in longer-term Treasuries each month, on top of its monthly purchases of $40 billion in mortgage-backed securities, until it sees a substantial improvement in the outlook for the U.S. labor market.
The Fed will fund the new Treasury purchases with an expansion of its $2.9 trillion balance sheet. Under the expiring "Operation Twist" program, the Fed bought an identical amount, but paid for them with proceeds from sales and redemptions of short-term debt.
The program is expected to swell the U.S. central bank's balance sheet to more than $3 trillion.
The sheer size of the Fed's holdings is "compounding the difficulty of exit" from the Fed's current super-easy monetary policy, Fisher told reporters after a speech here. "It might even impair our balance sheet."
Under current low Treasury yields, the Fed books gains on its bond holdings, and remits profits to the Treasury. If yields rise, the Fed may no longer be able to remit profits to the Treasury, he said.
"I worry that if we were to get into that situation -- please stress the word 'if' -- we might have more efforts to politically interfere with our independence," he said. "I'm not willing to tolerate that risk."
(Reporting by Ann Saphir; Additional reporting by Pedro Nicolaci da Costa in Washington; Editing by Chizu Nomiyama)