The Federal Reserve has assumed an “unaccustomed” role in “dramatically and proactively” restoring vibrance — largely through fiscal stimulus — into the “grim” U.S. economy said Federal Reserve Bank of Dallas President Richard Fisher in Japan Wednesday. But he said monetary policy alone won’t cure the ailing economy. “Monetary policy accommodative techniques are necessary but insufficient to the task,” Fisher told a symposium hosted by a private think tank in Tokyo. “The trick to fiscal policy is to provide the spark, to provide the right incentives, get the small and medium-sized firms to create jobs again, create dynamism in the economy without planting the seeds of inflation.” There is presently a “palpable lack of circulating confidence in the business community” in America, Fisher said.  And rightfully so — the economy contracted at an annual rate of 6.3 percent in the fourth quarter of last year, and Fisher said he expects that when the numbers are properly tallied, the contraction rate will be very similar for first-quarter 2009. All the while, the unemployment rate is rising and is expected by many, including Fisher, to surpass 10 percent by year-end. Confronted with such a dysfunctional economy, Fisher said the federal reserve has undertaken a rapid series of initiatives — hence, expanding the Federal Reserve’s balance sheet more than twofold from 2008. And “it is clear that we will grow our balance sheet even more…” he said — a prerogative which has fueled concerns over inflation, the demise of the dollar and the independence of the Federal Reserve. “We realize … we are at risk of being perceived as monetizing the fiscal largess of Congress” and that by intervening in mortgage-based securities and other markets could be seen as blurring the lines between fiscal and monetary policy — a threat to the Fed’s independence, he said. But “we are the central bank of the largest economy in the world, and we are duty bound to apply every tool we can to clean up the mess that our financial system has become and get back on the track of sustainable economic growth with price stability.” Fisher didn’t offer a projected timeline for recovery, but he assured the audience that the government’s continued attempts to fuel a “spark” to the U.S. economy, wouldn’t present a serious threat of inflation. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.