The U.S. Federal Reserve must be cautious to not validate the U.S. government's soaring fiscal deficit, but that doesn't mean the central bank should avoid purchasing government debt, Dallas Fed President Richard Fisher (non-voter) said on Monday evening.

"The Federal Reserve must, of course, be very careful to avoid the perception that it is monetizing the explosion of fiscal deficits," the central banker said, pointing out that such a move would undermine confidence in the U.S. economy. "This does not mean, however, that we should refrain from buying Treasuries in this time of crisis."

The comments come at a time when the Fed is considering buying Treasuries as a means to bring interest rates lower in the United States, many of which are tied to the yields on long term bonds.

At its last rate decision on Jan. 28, the Federal Open Market Committee adopted a wait-and-see approach over the idea of buying Treasuries saying, "The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."

Fisher also suggested that monetary policy is not the only way of effectively fighting the economic downturn in the United States, suggesting that the government's fiscal stimulus package, and the anticipated reforms to the Troubled Asset Relief Program, will also contribute to a recovery.

Nevertheless, any legislation being considered in Washington must not be protectionist, he added.

By Erik Kevin Franco and edited by Stephen Huebl
©CEP News Ltd. 2009