The Federal Reserve should pare its bond buying as quickly as possible, even if doing so sends stock prices tumbling, because more bond buying risks inflation and makes an eventual exit from easy policies more difficult, a top Fed official said on Tuesday.
Richard Fisher, president of the Dallas Federal Reserve Bank and one of the Fed's most hawkish policymakers, said that continued purchases by the U.S. central bank of Treasuries and mortgage-backed securities carries the risk of fueling an asset price bubble, though he stressed that no such bubble now exists.
Quoting analyst Peter Boockvar, Fisher said investors are seeing the world through "beer goggles." "Things often look better when one is under the influence of free-flowing liquidity."
"Were a stock market correction to ensue while I have the vote, I would not flinch from supporting continued reductions in the size of our asset purchases as long as the real economy is growing, cyclical unemployment is declining and demand-driven deflation remains a small tail risk,'' Fisher said in remarks prepared for delivery to the National Association of Corporate Directors.
"I would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date,'' said Fisher, who rotates into a voting spot on the Fed's policy-setting panel this year.
The Fed is well into a second year of its third round of quantitative easing, the extraordinary measures known as QE3 which are aimed at pushing down long-term borrowing costs in order to boost hiring and growth.