The U.S. Federal Reserve and other central banks must not succumb to calls for additional help from monetary authorities in the face of high budget deficits, two top Fed officials said on Friday.
Using the Fed as a printing press to solve the U.S. deficit problem would unleash the "sinister beast" of inflation and "is not an option," Dallas Fed President Richard Fisher told the Dallas/Fort Worth Minority Supplier Development Council.
"Our nation has a crying need for public leadership to correct what's wrong in the economy," Dallas Fed President Richard Fisher told the Dallas/Fort Worth Minority Supplier Development Council. Monetary policy, he said, "cannot do it alone," but "must be complemented by responsible fiscal policy."
Fellow inflation hawk Philadelphia Fed President Charles Plosser argued in a separate speech that any attempt to "resort to the printing press" to avoid budget trouble was doomed to failure and could lead to hyperinflation.
The goal of maintaining stable and low inflation should not be compromised even when market volatility appears to call for intervention, he said in prepared remarks at a conference held at his regional bank's headquarters.
"Despite the well-known benefits of maintaining price stability, there are increasing calls to abandon this commitment in both Europe and the U.S.," Plosser said, just two days after a coordinated international central bank action to provide dollar liquidity to global banks.
Plosser did not vote on that action, but his alternate, fellow hawk Richmond Fed President Jeffrey Lacker, dissented.
Fisher, for his part, supported the action, although he did not address the topic on Friday.
Data on Friday supported the notion that, while weak, the U.S. economy continues to grow moderately. The November employment report showed a gain of 120,000 jobs and a sharp drop in the jobless rate to 8.6 percent, which was 9 percent a month earlier.
Plosser, in an earlier interview with CNBC television before the labor report, said the job market remains disappointing but was "not falling off a cliff."
While he sees steady growth in the economy, Europe's problems remained a key threat to the U.S. expansion. Further monetary easing might be warranted if there is deterioration in the financial sector, Plosser said.
Part of the blame for the pressures on central banks to aid on fiscal problems goes to governments, Plosser said, which have failed to come to agreement on how to bring revenues and spending into balance.
But central banks, including the Fed, also bear some responsibility for crossing the line into fiscal policy with actions during the financial crisis and recession of 2007-2009, he added.
"Central banks are under increasing pressure to act, both because fiscal authorities have been unable to make credible commitments to maintain fiscal discipline and because central banks have been willing to engage in actions that stray into the realm of fiscal policy -- for example, purchasing assets of the housing sector," he said.
The Fed has kept short-term interest rates near zero for nearly three years, and signaled it would keep them there through at least mid-2013.
But the U.S. central bank has also reached for more unconventional methods to stimulate the economy, tripling the size of its balance sheet from pre-crisis norms and recently dipping its toes back into U.S. housing market by reinvesting proceeds of maturing mortgage and agency bonds into mortgage-backed securities.
Top officials have also discussed the possibility of another round of monetary easing that would entail large-scale purchases of housing debt.
Fisher for his part gave no sign that he would support further easing, putting the onus for new steps on Congress and warning that the European debt crisis is a sobering lesson for the United States.
Fisher referred to a recent conversation with European Central Bank official Juergen Stark, who two days ago spoke at the Dallas Fed to warn about political pressures for the central bank to expand its role into fiscal policy.
The United States, Fisher said Stark reminded him this week, has an even bigger debt burden than Europe.
"We don't want to be in a situation like Greece. We are headed that way, if we are not careful," Fisher said.
"We are headed in the wrong direction, and if we don't bring it under control, we are going to have social unrest."
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