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U.S. economy can handle reduction in bond-buys: Fed's Fisher

Federal Reserve Bank of Dallas President Richard Fisher speaks about the concept of breaking up 'too big to fail' banks to a breakout group
Federal Reserve Bank of Dallas President Richard Fisher speaks about the concept of breaking up 'too big to fail' banks to a breakout group

By Barbara Liston

ORLANDO, Florida (Reuters) - The U.S. economy can withstand a reduction in the Federal Reserve's stimulative asset-purchase program, even though the easy-money policies have boosted U.S. manufacturers and other companies, a top central bank official said on Thursday.

"Personally I think the economy is strong enough to begin the process," Dallas Fed President Richard Fisher, one of 19 policymakers at the central bank, said of the $85-billion monthly quantitative easing program, or QE3.

Investors are trying to guess when the Fed will start to wind down QE3 after Chairman Ben Bernanke said in June that it would likely happen later this year. Most observers predict the Fed will act in September, and a survey of dealers published on Thursday reinforced that view.

While U.S. growth is still tepid and the unemployment rate remained high at 7.4 percent last month, that rate is down from 8.2 percent a year earlier and economic data has been encouraging in the last few months. The Fed launched the bond-buying in September aiming to spur investment, hiring and economic growth.

"The key thing is the cumulative effect (of QE3) and understanding the cost of continuing to do this," Fisher told reporters on the sidelines of a manufacturing conference.

"Even if we do start dialing it back, whenever that is, we still will be buying more" bonds, he added. "It's a question of buying less than we did before."

With many expecting the policy change to come at a September 17-18 Fed policy meeting, investors are now wondering by how much the program could be reduced.

Primary dealers surveyed before the Fed's July policy meeting said they expected a $15-billion reduction in September. They expected policymakers to trim Treasury buys by $10 billion and mortgage-bond purchases by $5 billion, according to median responses to a survey conducted by the New York Fed.

Fisher, a policy hawk who has long complained that U.S. politicians have undermined the economic recovery, told the Orlando conference that while manufacturers have benefited from Fed policies, a more robust rebound in that sector requires less fiscal and regulatory restraint from Washington.

"American companies ... have taken advantage of the cheap and abundant money made available by the Fed's very accommodative monetary policy to create lean and muscular balance sheets," he said in a speech before meeting with reporters.

"While there are many risks in the policy that the Fed has been pursuing ... every manufacturer of goods in America has been given a great gift by your central bank," Fisher said.

The Fed has kept interest rates near zero since 2008 and more than tripled its balance sheet to some $3.6 trillion in an unprecedented effort to help the economy. But the recovery has been erratic and growth has remained below 2 percent this year thanks in part to tighter fiscal policies.

While U.S. manufacturing production took a beating in the 2007-2009 recession, it has rebounded in recent years and the latest monthly data show factory activity jumped to a two-year high in July.

"The remaining obstacle to being the absolute best economy for manufacturers and other businesses, bar none," Fisher added, "has been fiscal and regulatory policy that seems incapable of providing job-creating manufacturers and other businesses with tax, spending and regulatory incentives to take advantage of the cheap and abundant fuel the Fed has provided."

(Writing by Jonathan Spicer; Editing by Nick Zieminski)

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