The Federal Reserve’s monetary easing has reached its limit and it is now time for the government to put fiscal policy to work, according to Robert Heller, former governor of the U.S. central bank.
“Monetary policy, the foot is on the gas pedal, has been there for a long time, three years now,” Heller, who served on the Fed’s board from 1986 to 1989, told CNBC Asia’s “Squawk Box” on Wednesday. “And I think the Fed has done what it can do. It’s now the time for fiscal policy to do its part.”
Calls for the Fed to implement some sort of stimulus when it meets this week, either by extending Operation Twist beyond the end of June when it expires or by embarking on a new round of asset purchasing, have increased in the last several weeks as the debt crisis in Europe escalated and after U.S. economic data pointed to a persistently weak labor market. Janet Yellen, Vice Chairman of the Fed, also made the case for more easing earlier this month, giving investors hope that the Fed might be leaning towards doing more for the U.S. economy.
But those who are expecting the Fed to do more than extend Operation Twist are setting themselves up for disappointment, Heller said.
“There are many people on the board, and especially on the FOMC (Federal Open Market Committee), the bank presidents, I think are very reluctant to ease,” he said.
“And I don’t see the need for easing either, because the money supply in the United States is growing very satisfactorily, very stable 6, 6.5 percent range. And the Fed has to let that work.”
The Federal Reserve cannot continue to “essentially finance half the federal deficit,” Heller added.
U.S. stocks soared Tuesday, with the S&P 500 gaining nearly a percent, and the dollar fell, as markets priced in more than an extension of Operation Twist, which involves the Fed selling medium-term bonds and using the proceeds to buy longer-term ones, such as 10-year Treasurys, to drive down longer-term interest rates.
Heller argues that additional easing is not needed, as the problem is not lack of liquidity but poor credit quality of individuals and some companies.
“The banks have plenty of liquidity, there’s a dearth of demand for good credit,” he said. “There are not enough credit-worthy borrowers around at the present time in the United States, so people got to continue to repair their balance sheet.”
Besides the need for fiscal policies that boost economic growth, another issue that’s standing in the way of a stronger recovery in the U.S. is regulations and the difficulty of doing business. The government has to make it easier for the corporate sector to invest, Heller said, citing as an example the difficulty of obtaining building permits in California.
“You try to get a building permit for California here, it takes you years to get it…for commercial buildings, 3, 4 years,” he said. “If after the elections in the United States (in November), we will get an easing of some of the regulatory policies that are holding back the U.S. economy at the present time…if those regulations are eased a bit, then the U.S. economy really has the potential to grow much faster, snap back, and that doesn’t only go for the federal level, that goes for the state and the local level.”
—By CNBC’s Jean Chua.