By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — Continuing the Federal Reserve’s asset purchase program risks the “debasement” of the dollar, high inflation and “the ruination of our economy and lifestyle,” a central bank official said Tuesday.
Richard Fisher, president of the Dallas Fed, has been no fan of the Fed’s easy policy stance, but his warnings about the possible “tragic” consequences of quantitative easing, to a research firm in Toronto, were more strident than ever.
Dallas Fed President Richard Fisher
The first order of business in Washington is for lawmakers to get control of “rudderless” fiscal policy, Fisher said.
Without a budget deal, the cheap money the Fed has made available will not be put to use, he said.
“Until then, I argue that the Fed is, at best, pushing on a string and, at worst, building up kindling for speculation and eventually, a massive shipboard fire of inflation,” Fisher said.
While Fisher is not a voting member of the Fed’s interest-rate setting panel this year, his comments indicate that opposition to the quantitative easing program is hardening on the minority on the central bank already opposed to it.
The Fed has been buying $85 billion of Treasurys and mortgage-related assets each month since the beginning of the year.
Fisher said the Fed is now going through a period of “introspection.”
Many officials, including Fed Chairman Ben Bernanke, have said they are aware of the costs and risks of asset purchases.
Bernanke and his allies on the Fed have said they are open to reducing the rate of purchases in the next few meetings if they are satisfied with the economic data.
Another concern, Fisher said, is that Bernanke may step down when his term ends at the end of January 2014.
“To thicken the plot further, there is the uncertainty about whether command of the Fed will change hands during Act IV or V—whether the skipper who set us on the present course will stay (which I have personally advocated in other speeches) or be replaced by someone who wishes to remain on the course he set or change it,” he said.
A new chairman could want to change course, or Congress might try to steer the central bank in a new direction, Fisher said.
John Brady, managing director of global futures at RJ O’Brien & Associates in Chicago, said he senses growing sentiment in the market for Bernanke to stay.
“It would certainly lend itself to confidence and comfort in the market if Bernanke stays on for another term,” Brady said in an interview.
Earlier on Tuesday, Kansas City Fed President Esther George said she supports tapering the asset purchases.
George, a vocal opponent of the asset purchase plan, is a voting member of the Fed’s policy-setting panel this year. She has voted against quantitative easing in the Fed’s three policy meetings so far in 2013.
The Fed will meet again on June 18-19 to set interest rate policy. Many analysts, including Jan Hatzius, the chief economist at Goldman Sachs, think the Fed won’t start reducing the rate of its asset purchases until September at the earliest. Read the Tell blog.
George warned that “several sectors of the economy are becoming increasingly dependent” on the Fed’s easy policy stance.
For instance, she noted that debit balances in security margin accounts at broker-dealers hit an all-time high in April. She also said that investors are getting more aggressive in seeking out riskier assets in the leveraged loan market.
“History suggests that waiting too long to acknowledge the economy’s progress and prepare markets for more-normal policy settings carries no less risk than tightening too soon,” George said.
Mohamed El-Erian, chief executive at giant bond fund Pimco, said the Fed is facing a dilemma.
“QE is a medication that comes with a warning which says ‘do not use it for a very long time because you get side effects,’” El-Erian said in a television interview.
“Well. We’ve been using it for a very long time, so we’re getting side effects, but we don’t know what to replace it with,” he added.