The Federal Reserve's monetary stimulus program cannot continue forever, Richard Fisher, President of the Federal Reserve Bank of Dallas told CNBC on Tuesday.
"We've changed and impacted the markets because of our intervention and I understand there's sensitivity, but markets should also bear in mind that this program cannot go on forever," he said.
"The balance sheet is $4 trillion and there are limits to what the Federal Reserve can do," Fisher, who is in Melbourne speaking at an Economic Development for Australia function, added.
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There has been intense speculation in recent months over when the Fed will start to scale back its $85 billion-a-month asset purchase program, also known as quantitative easing.
A partial shutdown of the U.S. government in October and worries about the impact of political wrangling over raising the debt ceiling prompted many analysts to push back their expectations for when Fed tapering might begin. But signs of strength in the U.S. economy, for instance Friday's stronger-than-expected non-farm payrolls report, have re-ignited the Fed taper talk.
"Every bond we buy comes back to us in terms of excess reserves," said Fisher, who is set to become a voting member of the Fed from next year.
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"Our balance sheet has become bloated and at some point, we will have to taper back on the pace of purchases but that doesn't mean we'll stop. We'll have less accommodation as opposed to the current $85 billion a month," he added.
The Fed has come under fire by critics for not being clear enough with its forward guidance and confusing investors as to when tapering will occur and how long interest rates are likely to stay low.
Fisher told CNBC that the Fed had not communicated with markets as effectively as it could have.
"The real issue that markets care about is the forward guidance, what will we do after we stop this program or slow it and then stop it... I don't think we've been clear enough in our articulation of what we'd like to do," said Fisher.
As the Fed mulls when to scale back its monetary stimulus it poses a number of challenges, one of which is that as it moves closer to a taper, markets sell off, but at the same time maintaining the steady flow of cheap money continues to worsen the U.S. government's fiscal problems. Fisher acknowledged that the Fed was in effect caught in its own trap.
"We could be in our own little monetary trap here because being data dependent doesn't really define for the market place where we will end this program or begin to taper back the current rate of purchases," he said.
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However, Fisher added that despite a number of influential critics coming down on the Fed for seemingly making things up as they go along, he reiterated that the bank had a clear "road map" for future monetary policy.
Fisher has been quoted several times in the past criticizing the prospective new Fed chairperson Janet Yellen's views on economy policy.
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But Fisher refused to be drawn on these views in his interview on CNBC, and instead emphasized how a chairman's role has always been to achieve consensus among committee members rather than enforce their own agenda.
"The media places too much weight on what Janet has argued in her individual capacity as a governor. That is not the role she will play any longer, her job is to bring about consensus among the 19 members," he added.
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