Slowing the Federal Reserve's current pace of monthly asset purchases could paradoxically help the U.S. housing market, a top Fed official said on Thursday.
"The housing market is getting to be quite strong. It's quite possible, in my view - and this is my personal opinion - that a little tapering there would actually make people realize that we've bottomed out on the interest rate cycle," Dallas Fed President Richard Fisher told Fox Business Network in a TV interview. "I think you'd actually see more activity than you are currently seeing."
Fisher in the past has said that the Fed's super-easy monetary policy may actually deter borrowing because consumers can continue to count on low borrowing costs far into the future. By cutting back on bond purchases, the reasoning goes, the Fed could touch off a rush of economy-boosting borrowing as consumers try to lock in low mortgage rates.
The Fed has been buying $40 billion in mortgage-backed securities and $45 billion in Treasuries each month to push down longer-term borrowing costs and encourage businesses to boost hiring.
That's on top of vowing to keep short-term interest rates at rock bottom until the unemployment rate falls to at least 6.5 percent, as long as inflation stays under control. Unemployment is currently at 7.9 percent.
Fed Chairman Ben Bernanke and several other influential members of the Fed's policy-setting committee have argued that the benefits of the bond-buying program clearly outweigh possible costs.
But Fisher, who does not vote on the Fed's policy-settting panel this year, has been among the minority who has emphasized the risks of continuing to add to the Fed's balance sheet, now at a record $3.091 trillion.
"The issue to me is, how do we get out of this huge expansion of our balance sheet, and what will be the risks that we run in doing so as interest rates come up and the economy improves," he said Thursday.
The Fed's latest round of bond buying has deliberately fueled the U.S. stock market, he said, in hopes of delivering a "wealth effect" that would get consumers spending again.
The Dow Jones Industrial Average closed at a record high for a third straight day on Thursday, and though the trend might yet "end in tears...things are moving in the right direction," he said.
But even as he credited the Fed's bond-buying program with helping pull the housing market out of its post-recession slump, Fisher called for ratcheting it back and letting "natural" forces take hold.
"I'm not talking about cutting off the purchases, just tapering it down so we have less accommodation than we have now," he said.
(Reporting by Ann Saphir; Editing by Bob Burgdorfer)