Richard Fisher, president of the Federal Reserve Bank of Dallas, said he opposed the Fed's latest attempt to boost economic growth because he fears it won't work _ and it could scare consumers and squeeze bank earnings.
In a speech in Dallas Tuesday, Fisher said the action taken last week and other recent Fed moves "are likely to prove ineffective and might well be working against job creation."
At its September 20-21 meeting, the Fed's policymaking committee voted 7-3 to lower mortgage and other long-term interest rates by reshuffling its $2.9 trillion investment portfolio. The Fed will shift $400 billion from short-term to longer-term Treasurys through next June.
Fisher was one of the three voting members to oppose the decision. So far, he's the only one to publicly explain his vote. The other dissenters were Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota.
In August, the three also opposed the Fed's plan to keep short-term interest rates near zero through mid-2013, as long as the economy stays weak. It was the highest level of dissent at the Fed in nearly two decades. The dissenters have expressed concern that the Fed's easy money policies risk igniting inflation.
Like Fed Chairman Ben Bernanke, Fisher called on Congress and the White House to do more to stimulate economic growth. But where they disagree is over whether the Fed should be taking action, too.
Until Congress gets its "act together," any policies adopted by the Fed "will represent nothing more than pushing on a string," Fisher said.
Businesses and banks are already sitting on plenty of cash, Fisher said. They're just too scared and cautious about the future to take risks. That suggests that cutting interest rates further from today's near-record lows won't do much to get banks to lend and businesses to invest, hire and expand.
Fisher said last week's move, dubbed Operation Twist, could prove counterproductive. It might signal to consumers that the Fed believes the economy is "in worse shape than they thought" and prompt them to hoard money, Fisher said.
It could also narrow the profits banks earn from the spread between the short-term rates they pay depositors and the longer-term rates they collect on loans.
And lower rates could force pension funds to set aside extra money to meet their future obligations to retirees _ diverting money that might otherwise have gone into investments that could generate jobs, Fisher said.
Investing more heavily in longer-term Treasurys also poses risks for the Fed. When the economy strengthens, longer-term interest rates will rise, reducing the value of the bonds in the central bank's portfolio. As a result, the Fed might be tempted to keep rates low just when it should be raising them to control inflation.
Fisher didn't specifically suggest that reshuffling the Fed's portfolio would send consumer prices higher. But the self-described "inflation hawk" rejected suggestions, by Harvard University economist Kenneth Rogoff and others, that a dose of higher prices might encourage consumers to spend money they'd otherwise save. He said he's worried that the Fed would struggle to contain inflation, as it did in the 1970s, once consumers and businesses began to expect ever-higher prices.
Asked if he saw signs of hope for the economy, Fisher cited the example of Texas, where the economy has generally outperformed the nation. He called for limited government and pro-business policies, without offering specifics. Fisher said both major parties shared responsibility for the economy's troubles. He's hopeful that lawmakers are starting to take the challenges more seriously.
"Now we're having a serious discussion, and it's going to be crude and rough," Fisher said. "I think we're getting there, but it's going to be tough, and we're going to need leadership to get there."
At the Fed, Fisher said, debates between policymakers are far more civil than they are between congressional Republicans and the White House. "When we meet," he said, "each of us lays out our arguments calmly, with great respect for each other and without acrimony _ an approach that is sadly rare elsewhere in government."
He said the Fed has already done just about everything it can to help the struggling economy.
"I wouldn't say we're out of bullets," he said, but whatever ammunition the central bank has left, "we need to deploy very, very carefully."
Koenig reported from Dallas