Fed's Fisher says Fed will do what it takes

DALLAS (Reuters) - The U.S. Federal Reserve will take whatever steps it deems necessary to keep financial markets open and end the country’s year-long recession, Dallas Fed President Richard Fisher said on Thursday.

“We will not shy from pursuing every practicable means of supporting the functioning of financial markets and stimulating the economy back to a steady state by employing new techniques that fit the current circumstance,” Fisher, one of the Fed’s top policy-makers, said in prepared remarks.

“We stand ready to grow our balance sheet even more should conditions warrant. For example, we will expand purchases of mortgage-backed securities, should we feel such purchases would be productive,” he told the World Affairs Council of Dallas/Fort Worth.

Fisher is a voting member of the Fed’s interest-rate setting committee this year and therefore supported the Fed’s dramatic decision on Tuesday to hack its interest rate target to a range of between zero and 0.25 percent, from 1 percent.

With benchmark rates now effectively at or very near zero, the Fed -- the U.S. central bank -- has deployed a set of innovative, unconventional tools to protect the economy.

This recalls the quantitative easing used by the Bank of Japan to end a decade of stagnation in the 1990s. Fisher said the Fed’s focus was on the other side of the balance sheet; on assets rather than liabilities, in an effort to lower private sector borrowing costs and boost spending.

“We believe that emphasizing the asset side of the balance sheet will do more to improve the functioning of credit markets and restore the flow of finance to the private sector.

“In the parlance of central banking finance, I consider this a more qualitative approach to ‘quantitative easing’,” he said.

The U.S. economy entered a recession a year ago and Fisher made plain it would shrink between 4 and 5 percent this quarter and not begin to recover until the second half of next year.

“Industrial production is falling sharply; consumption is cascading downhill; demand has evaporated as businesses and consumers alike pull in their horns and de-lever from excess indebtedness that fuelled the prior boom,” he said.

This has destroyed some two million U.S. jobs this year and Fisher warned that the damage would continue to mount.

“Unemployment has increased to 6.7 percent at the last reading and appears to me to be headed in the direction of, and possibly past, 8 percent,” he said.

Editing by James Dalgleish