WASHINGTON - Dallas Federal Reserve Bank President Richard Fisher Wednesday warned that the Federal Reserve must ensure that its actions to support the credit markets does not encourage "fiscal largesse" and re-ignite inflation concerns.
In an interview on CNBC, Fisher also defended his decision as a member of the Federal Open Market Committee to dissent against cutting interest rates in 2008.
Fisher also praised Fed actions in tackling the financial turmoil, saying, "I do feel we (the U.S.) where ahead of the curve and I hope that the marketplace appreciates that."
Asked if the Federal Reserve is monetizing the debt of the government by purchasing up to $300 billion of U.S. Treasuries, Fisher said he feels very strongly about this subject and warned, "We have to be very careful not to be perceived as monetizing fiscal largesse to the degree that we create inflationary impulses going forward."
He added that he supports the decision of the FOMC to purchase government debt, but stressed the importance "not to ignite the embers of inflation going forward -- either because of perceptions or because of reality."
Every member of the FOMC, he assured, is fully aware that buying Treasuries "is a perception risk and a moral hazard and we'll have to manage it."
Fisher also described the $1.75 trillion the Fed will spend purchasing treasuries and mortgage-backed debt as a "significant number," and so far the market seems to have "greeted it well."
Asked if the U.S. government has provided enough fiscal stimulus to the ailing economy, Fisher replied that the Obama administration is "doing a lot" to get the economy going again. He projected however, that he still expects the U.S. economy will not get into positive territory until 2010.
Fisher also said he was not wrong to dissent against slashing interest rates in 2008, pointing to "enormous inflationary pressures up through the end of the summer." "Nobody foresaw this dramatic turn that took place in the global economy," he said.
The issue, Fisher said, has always been the availability of money not the price, noting, "It is still a question of the credit markets functioning. I've been fully supportive of all the tools we have brought to bear in order to get the markets functioning again."
As for criticisms that some Fed programs only target individual credit markets and should provide more broad support, Fisher pointed out that Fed purchases of mortgage-backed securities have driven rates down to "historic lows," the commercial paper program he added, has also been very effective.
Commenting on the idea of a special prosecutor to oversee the institutions receiving TARP funds, Fisher warned there is a question of whether such a political decision will put-off firms willing to borrow from the various liquidity programs available like the Term Asset Liquidity Facility (TALF).
"This is the tension that exists between politics and the need to express anger and also to pursue policies according to political dictates," he said -- something the bond markets require to function efficiently.
Acknowledging that issues such as political intervention is upsetting market operators, Fisher projected that this kind of tension will remain in place until "this all gets settled out."
And the ongoing G20 meeting? Fisher said he does not expect "a whole lot" out of the gathering. "I think the public has too-high an expectation for action to come out of them," he said, but it is the bilateral meetings that will be more productive.
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