SAN ANTONIO (Reuters) - Dallas Federal Reserve Bank President Richard Fisher said on Wednesday that the U.S. central bank had taken “substantial and many” measures to boost market liquidity, and had not yet run out of options.
“I do not think we have exhausted our tool kit. But at the same time, the measures and initiatives that we have taken are to be considered against doing the minimum necessary to restore market efficacy,” Fisher told reporters after a speech.
The Fed has taken a series of emergency measures to keep the financial system from seizing up and Fisher said the actions have helped.
“I hope and I think that it has alleviated some of the pressures,” he said.
Fisher is a voting member of the Fed’s interest rate-setting policy committee this year and dissented against its last rate cut at its March 18 meeting. Fed documents on Tuesday showed he preferred the Fed to focus on liquidity measures.
A Fed official said separately on Wednesday that the central bank was considering further steps to tackle liquidity problems in case the actions already undertaken fail to gain traction.
Fisher made plain that additional steps would have to be justified very carefully.
“I believe, personally speaking, that we should do the minimum necessary to restore the efficacy of the system.”
In his speech, Fisher said the Fed risks provoking inflation if it cuts interest rates by so much that markets are flooded with liquidity.
Fisher said the Fed had opened the monetary ‘spigot’ by lowering its benchmark overnight federal funds rate to shield the economy from a housing and financial market crisis.
“If we turn the spigot up too forcefully, we will flood and kill the grass (of the economy) with inflation,” he told a Dallas Fed community forum.
Fisher later told reporters that the latest news on inflation had not been too bad.
“We had a decent month of numbers. You never go based on one month ... We have to be mindful of the fact as we set monetary policy ... this is one of the factors that we have to take into account constantly,” he said.
It was his second dissent against rate cuts this year, cementing his reputation as one of the more hawkish members of the Fed’s policy-setting committee.
Noting the ‘pipes’ of the financial market system have been clogged by the financial crisis, Fisher also made plain that he was skeptical of the merits of further policy easing.
“Until the confusion and the debris are cleared away, financial intermediaries will be reluctant to book new loans or incur additional risk. This retards the impact of additional monetary accommodation,” he said.
The Fed has cut benchmark overnight U.S. interest rates by 3 percentage points to 2.25 percent since mid-September after the collapse of the risky subprime mortgage market sparked a global credit crunch and chilled U.S. economic growth.
Fisher acknowledged the U.S. economy would continue to suffer a “bout of anemia” until housing and financial market strains recede, and he warned that this might take some time.
“The housing crisis may not yet have run its course, and further danger could lie ahead ...,” he said.
He also defended the recent spate of emergency Fed measures to prevent the financial system from seizing up but stressed this had been done reluctantly and should not be viewed as a bailout by the Fed.
“The objective of all this activity is to provide a bridge for the financial system while it transitions from a period of indiscriminate excess and gets back to normalcy,” he said.
“I do not believe the Fed should be, or is, ‘bailing out’ any particular institution. Nor do I personally believe that any institution in and of itself is ‘too big to fail’.”
Reporting by Alister Bull; Editing by James Dalgleish