Fischer says Fed's QE an effective stimulus

Federal Reserve Vice Chair Stanley Fischer on Friday said the Fed's exceptional large-scale asset purchases were continuing to provide "meaningful stimulus" to the US economy.

At a monetary policy forum in New York, Fischer laid out the positive effects of the central bank's massive rounds of quantitative easing aimed at pulling the economy out of the 2008-2009 Great Recession.

The controversial QE tool also has been used by the British and Japanese central banks amid a slowing global recovery and is set to be launched next month by the European Central Bank to revive the eurozone.

Fischer noted that the Fed's balance sheet over the past several years has swollen to about $4.5 trillion, largely reflecting the QE programs, from about $900 billion in 2006.

The asset purchases, aimed at tamping down longer-term interest rates to support the recovery, reduced unemployment by 1.25 percentage points and lifted inflation a half point, he said, citing Fed data.

"The estimates imply that these macroeconomic effects are only now manifesting themselves in full, reflecting the inherent lags in the monetary transmission mechanism," Fischer said, according to his prepared remarks.

"Our conclusion is that asset purchases over more recent years have provided meaningful stimulus to the economy, and continue to do so," he said.

Fischer acknowledged that the Fed's balance sheet, which he said now represents 26 percent of nominal gross domestic product, compared with six percent in 2006, before the crisis, together with low interest rates, "could pose risks to financial stability."

The very large asset holdings could complicate the Federal Open Market Committee's move to raise the federal funds rate, he said.

The FOMC has signaled it could raise the key rate, pegged near zero since December 2008, as early as mid-year.

The FOMC ended the latest QE program in October and has continued to reinvest in the assets as it winds down the exceptionally accommodative monetary policy.

It does not plan to sell the assets to bring the balance sheet to a more normal size, and instead will stop reinvesting in the principal "when the time comes," Fischer said.

"The Fed -- and other central banks -- can implement an expansionary monetary policy even when the policy interest rate is at the zero lower bound," he said.

"The current high level of securities holdings will present some challenges for policy normalization, but we are confident that we have the tools necessary to remove accommodation at the appropriate time and at the appropriate pace."