QE3 has finally ended, and in a speech to the Shadow Open Market Committee, president and CEO of the Federal Reserve (Fed) Bank of Dallas president and CEO Richard Fisher argues that we should hold off judgment on whether or not the extraordinary policy worked until we have seen it fully unwind, comparing the present situation to the end of Act IV in a five act play. Even though he would rather we not have had QE3 at all, if the exit is well-managed he can imagine it going down in history as a major success.

“The happy outcome to our economic predicament would entail the marriage of sensible fiscal policy with prudent monetary policy, carrying the American economy to new horizons, allowing the Fed to emerge a hero,” said Fisher. “One can envision less-pleasant outcomes, however, some of them tragic.”

Fed: Cost-free debt mostly used for buybacks, dividends, cash holdings

Fisher has been critical of Congress in the past, and he continued laying into the country’s fiscal authority in today’s speech, saying that it was their and the president’s joint failure to enact meaningful structural reforms that left so much liquidity on the sidelines, earning 25 basis points in a Fed bank instead of being invested in the recovering economy.

“Even if you were living under a rock, you know that this gift of near-cost-free debt as measured in inflation- and tax-adjusted terms has thus far been used primarily to finance stock buybacks, increase dividends and fatten cash reserves, and recently, finance mergers by the most creditworthy companies,” said Fisher.

Fisher also says that the $2.7 trillion parked at the Fed might be just a fifth of the liquidity that’s ready to be invested as soon as economic and fiscal conditions are favorable. That may be better than the alternative, a weak recovery killed by a lack of available capital, but it also brings the danger of a sudden jump in inflation.

“There is a lot of inflationary tinder available should the Fed mismanage its exit from the hyper-accommodative policy we have pursued and augmented with QE3,” says Fisher.

Wage inflation will catch up with employment, says Fisher

One point where Fisher disagrees with many critics is the notion that QE hasn’t done anything to help the working class. He points to unemployment falling about a percentage point per year, and says that the focus on wage inflation, while reasonable, misses that wage inflation typically lags employment gains and that the current situation is roughly what you would expect.

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