The Federal Reserve's failure to make the expected cut in its bond- buying programs calls the body's credibility into question, Dallas Fed President Richard Fisher said in prepared remarks Monday.
The S&P 500 hit an all-time-high and 10-year Treasury note yields fell Wednesday after the Fed decided to postpone a widely expected reduction of its $85 billion-a-month bond buying. The tapering, as it is known in the market, was supposed to signal that the economy had improved enough that the Fed felt confident start cut its bond buying by up to $10 billion a month.
By backing off the expected tapering, the Fed contradicted the message it had been sending to markets for months and has made future policy direction murkier, Mr. Fisher said during a speech to banking- industry representatives.
"Today, I will simply say that I disagreed with the decision of the committee and argued against it," said Mr. Fisher in his speech. "Here is a direct quote from the summation of my intervention at the table during the policy 'go round' when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: 'Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.' I believe that is exactly what has occurred, though I take no pleasure in saying so."
The market's reaction showed that the Fed's need to reform its communications policy, possibly by holding post-meeting press conferences more frequently, Mr. Fisher said.
"You should never wink at a girl in the dark," Mr. Fisher said. "Our communications policy is a little off--we should work harder to refine it."
The Fed would continue discussing tapering its bond buying and possibly reduce purchases of both Treasurys and mortgage-backed securities, Mr. Fisher said. The decision against starting it sooner came partly because of a perceived "tenderness" in an otherwise strong housing recovery, Mr. Fisher said.
Mr. Fisher, a non-voting member of the board, is opposed to continued bond buying by the Fed. He is also against the Fed's continued policy of rock-bottom interest rates, something favoured by Janet Yellen, the favourite to replace outgoing Fed Chief Ben Bernanke.
"She's wrong on policy, but she's a darn good, decent wonderful person," Mr. Fisher said.
Mr. Fisher also took issue about how the White House floated the name of Lawrence Summers as someone to replace Mr. Bernanke because it threatened to draw the independent Federal Reserve Board into the realm of politics. Mr. Summers withdrew his name as a candidate after a backlash from senators.
"The White House has mishandled this terribly," Mr. Fisher said. "This should not be a public debate."
The Fed remains wary that the US economy, while showing steady improvement, is still not strong enough for the central bank to start scaling down its efforts to spur stronger growth, Federal Reserve Bank of New York President William Dudley said earlier in the day.
Meanwhile, bank lending increased overall in the second quarter but at a slower rate compared to earlier in the year, Mr. Fisher said. Lending to small businesses fell 36 basis points as larger banks focused on using their trading arms to make money, Mr. Fisher added.
Larger banks were also watering down their lending standards in a bid to win loan business from their smaller competitors, Mr. Fisher said. Five years after the collapse of Lehman Brothers Holdings Inc. threatened the wider economy, the regulatory framework has not been built to ensure that the largest banks do not pose as great a threat to the overall economy, Mr. Fisher said.
"The largest financial institutions are a dagger pointed at the heart of our economy," Mr. Fisher said.