US Economy Remains Grim: Fed's Fisher

The U.S. economy is grim, and the Federal Reserve is "duty bound to apply every tool" to clean up the financial system and clear a path for a return to sustainable growth, Richard Fisher, president of the Dallas Fed, said Wednesday.

"The men and women who operate our businesses and create and sustain employment have assumed a defensive crouch," Fisher said in remarks prepared for a speech to a forum sponsored by the Japan Center for Economic Research in Tokyo. "The result is an American economy in statis."

With firms doing all they can to cut costs, and especially the cost of labor, the jobless rate is likely to hit 10 percent by year-end compared with 8.5 percent in March, he said.

"Presently, the risk is deflationary job destruction."

The U.S. economy probably shrank in the just-ended first quarter of 2009 at a rate similar to the 6.3 percent annual decline posted in the fourth quarter of 2008, he said, giving no timeline for a potential recovery.

With the world "groaning with excess capacity," rising inflation will probably not be an issue for the next couple of years, Fisher said. "The problem with regard to maintaining price stability most certainly is not inflation."

Fisher said the Fed has been "dramatically proactive and highly innovative" in attempting to resurrect the credit markets and halt the deep economic recession that started in the United States in December 2007.

AP

"We are duty bound to apply every tool we can to clean up the mess that our financial system has become," he said.

Fisher is not a voting member of the Federal Open Market Committee in 2009.

Although the Fed has run up its balance sheet dramatically and will do so further based on its current commitments, Fisher said fears that dollar-based fixed-income portfolios would be debased have been "unfounded" so far.

"The problems facing the largest competitive currency, the euro, are perhaps even more substantial than those confronting the United States," he said. "Demand for U.S. Treasurys ... will be determined by their attractiveness relative to alternatives and they may be judged more, rather than less, attractive under most reasonable future scenarios."

The Fed is determined to "short-circuit" any inflationary consequence of its balance sheet growth, and is in the process of acquiring new tools to help, Fisher said.

"We realize ... we are at risk of being perceived as monetizing the fiscal largess of Congress" and that by intervening in mortgage-based securities and other markets could be seen as blurring the lines between fiscal and monetary policy — a threat to the Fed's independence, he said.

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