December 2, 2011 / 4:05 PM / in 8 years

Fed hawks say central banks can't solve fiscal woes

DALLAS/PHILADELPHIA (Reuters) - The U.S. Federal Reserve and other central banks must not succumb to calls for additional help from monetary authorities in the face of high budget deficits, two top Fed officials said on Friday.

Richard Fisher, president of the Federal Reserve Bank of Dallas, answers a question from the audience after delivering the 2009 Albert H. Gordon Lecture about the current financial crisis at the John F. Kennedy School of Government at Harvard University in Cambridge, Massachusetts February 23, 2009. REUTERS/Brian Snyder

Using the Fed as a printing press to solve the U.S. deficit problem would unleash the “sinister beast” of inflation and “is not an option,” Dallas Fed President Richard Fisher told the Dallas/Fort Worth Minority Supplier Development Council.

“Our nation has a crying need for public leadership to correct what’s wrong in the economy,” Fisher said. Monetary policy, he said, “cannot do it alone,” but “must be complemented by responsible fiscal policy.”

Fellow inflation hawk Philadelphia Fed President Charles Plosser told a conference at his bank’s headquarters that any attempt to “resort to the printing press” to avoid budget trouble was doomed to failure and could lead to hyperinflation.

“Despite the well-known benefits of maintaining price stability, there are increasing calls to abandon this commitment in both Europe and the U.S.,” Plosser said, just two days after a coordinated international central bank action to provide dollar liquidity to global banks.

Plosser did not vote on that action, but his alternate, fellow hawk Richmond Fed President Jeffrey Lacker, dissented.

Fisher, for his part, supported the action, although he did not address the topic on Friday.

Boston Fed bank President Eric Rosengren, one of the Fed’s most dovish members, said the central bank move already has had a positive effect.

“That operation, I would think, has been quite successful in changing people’s perception about the pressures that were going to be occurring in the euro-dollar market,” said Rosengren, who will next be a voter on the Fed’s policy-setting committee in 2013.

But Rosengren told an investor conference in Boston that European governments have “a long way to go” in improving their fiscal positions.

JOBS?

Data on Friday supported the notion that, while weak, the U.S. economy continues to grow moderately. The November employment report showed a gain of 120,000 jobs and a sharp drop in the jobless rate to 8.6 percent from 9 percent.

Plosser, in an earlier interview with CNBC television before the labor report, said the job market remains disappointing but was “not falling off a cliff.”

While he sees steady growth in the economy, Europe’s problems remained a key threat to the U.S. expansion. Further monetary easing might be warranted if there is deterioration in the financial sector, Plosser said.

Part of the blame for the pressures on central banks to aid on fiscal problems goes to governments, Plosser said, which have failed to agree on how to bring budgets into balance.

But central banks, including the Fed, also bear some responsibility for crossing the line into fiscal policy with actions during the financial crisis of 2007-2009, he added.

“Central banks are under increasing pressure to act, both because fiscal authorities have been unable to make credible commitments to maintain fiscal discipline and because central banks have been willing to engage in actions that stray into the realm of fiscal policy — for example, purchasing assets of the housing sector,” he said.

The Fed has kept short-term interest rates near zero for nearly three years, and signaled it would keep them there through at least mid-2013.

Officials are considering further transparency measures and Plosser, a member of the central bank’s communications committee said the Fed is mulling not only publishing officials’ expectations about the path of rates but also, potentially, their views on unconventional policies like asset buys as well.

Still, Plosser stressed the Fed would like to return to the days when the benchmark federal funds rate was the primary lever for policy.

UNREST

Top Fed officials have also discussed further easing through large-scale purchases of housing debt.

Plosser says he would oppose such a plan, which he sees as crossing the line into fiscal policy since it represents de facto credit allocation to a specific sector.

Fisher gave no sign he would support further easing, putting the onus for new steps on Congress and warning that the European debt crisis offers a sobering lesson.

Fisher referred to a recent conversation with European Central Bank official Juergen Stark, who two days ago spoke at the Dallas Fed to warn about political pressures for the central bank to expand its role into fiscal policy.

The United States, Fisher said Stark reminded him this week, has an even bigger debt burden than Europe.

“We don’t want to be in a situation like Greece. We are headed that way, if we are not careful,” Fisher said.

“We are headed in the wrong direction, and if we don’t bring it under control, we are going to have social unrest.”

Editing by Chizu Nomiyama

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