(Updates with comments from Q&A, adds byline; dateline
previously NEW YORK)
By Svea Herbst-Bayliss
CAMBRIDGE, Mass Feb 23 The Federal Reserve
stands ready to do everything in its power to combat the
financial crisis and recession and buying long-term Treasury
bonds could be helpful, a top Fed official said on Monday.
"Few of us imagined in our wildest dreams that our global
economy could have turned so rotten so quickly," Richard
Fisher, president of the Federal Reserve Bank of Dallas, told
Harvard's John F. Kennedy School of Government in Cambridge,
"We are duty-bound to apply every tool we can to clean up
the mess that has soiled the face of our financial system and
get back on the track of sustainable economic growth with price
stability," he said.
The Fed has lowered interest rates almost to zero and
pumped hundreds of billions of dollars into financial markets
as it tries to prevent a severe recession from turning into a
prolonged slump. With companies slashing jobs aggressively,
Fisher said that "unemployment appears to me to be headed in
the direction of, and possibly past, 9 percent."
Fisher, who is not a voting member on the Fed's
policy-setting committee this year, said options to battle the
crisis include buying longer-term Treasuries, expanding
holdings of mortgage-backed paper and buying larger amounts and
different forms of asset-backed paper.
The Fed has already launched a stunning array of emergency
lending programs, which have contributed to the Fed's balance
sheet more than doubling in size.
While the Fed is prepared to grow its balance sheet further
if needed, "we have to be very careful in deploying our
arsenal," Fisher said.
He said the Fed must avoid appearing to monetize the
"exploding" fiscal deficits, as this could undermine confidence
in the central bank's independence and commitment to price
"These concerns do not preclude some Treasury purchases,
however, as we seek to strengthen the economy in this time of
crisis," he said. "With short-term Treasury rates near zero an
argument can be made that buying longer-term Treasuries would
be especially effective in this regard."
He said Treasury purchases are not unusual, noting the Fed
already buys Treasury bonds with a wide range of maturities as
it balances its portfolio. "So we are talking only about a
possible change in emphasis here," he said.
That said, the Fed shouldn't try to peg long-term rates.
"We must be very careful not to provide for an unsustainable
and potentially disruptive distortion in the benchmark market
for Treasuries through any extraordinary efforts beyond our
normal balancing operations," Fisher said.
In the asset-backed securities market, the Fed should make
sure that it does no more than the absolute minimum needed, he
Fisher, who as a voting member of the Fed's policy-setting
meeting last year supported the lowering of the fed funds rate
to between zero and 0.25 percent, said he remained concerned
about the effects of low rates on aging baby-boomers and the
elderly who played by the rules and are now earning meager
returns on their savings.
Answering audience questions about bank nationalizations
after his speech, Fisher said he personally believes the
government should not get involved in private business.
Any interventions should be short-term, he said, stressing
that authorities should always have an exit strategy that can
be "realizable very quickly."
(Writing by Kristina Cooke; Editing by Leslie Adler)