Dallas Fed’s Fisher, Richmond Fed’s Lacker cautious on QE2

On Tuesday, a couple of heavy hitters from the Fed weighed in on the current round of Treasury purchases commonly known as QE2. Though known for their relatively hawkish views, it shouldn’t come as a surprise that both the Dallas Fed President Richard Fisher and Richmond Fed Chief Jeffrey Lacker urged caution.

First, let’s look at the always colorful Richard Fisher. Worried about what he sees as reckless fiscal policies put in place by the legislative branch, Fisher said in prepared remarks, “We have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise.

"There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: 'Monetary policy responsibility cannot substitute for government irresponsibility.' ”

He went on to  say that “the entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases.

“I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation.
 
“And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream.”

Taking a shot at the last one-term Democratic president, Fisher added, “I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.”

In the meantime, Lacker seemed just as aggressive in his speech, as he implied that the complete plan to buy $600 billion in longer-term Treasuries could be cut short. The FOMC has “committed to regularly review the pace and overall size of the asset-purchase program in light of incoming information and adjust the program as needed," he said.

“The distinct improvement in the economic outlook since the program was initiated suggests taking that re-evaluation quite seriously. That re-evaluation will be challenging, because inflation is capable of accelerating, even if the level of economic activity has not yet returned to pre-recession trend."

For those who see an impending wave of inflation hitting the shores of the U.S. economy compliments of an extraordinarily loose monetary policy, which is being supplemented by a powerful fiscal policy, will be disappointed if the Fed doesn’t halt QE2.

Growth is accelerating, and the economy is beginning to enter a more self-sustaining phase.  I believe we will see a more aggressive approach by the nation’s leading companies when it comes to hiring.

But it hasn’t happened yet, and with only 36,000 jobs created in January, Fed Chairman Bernanke won’t budge from the current path.