The Federal Reserve should raise interest rates despite low inflation, realizing the drop in oil prices is keeping headline inflation low, Federal Reserve Bank of Dallas President Richard Fisher said Wednesday.
"Right now, we are trying to understand the dynamics of inflation," Fisher said in a speech in New York on Wednesday, according to prepared text released by the Fed. "We have declared a 2% intermediate target for inflation, which seems to be standard for most central banks. Headline inflation measures show a significant shortfall from that target."
But recently, inflation has retreated further from the 2% target. "Should this low, and still falling, rate of price inflation retard the date of the liftoff from the zero-interest-rate policy we have been operating for more than six years? I think not," he said. "We all know that headline inflation is being held down by the big decline in energy prices that began in the second half of 2014. We know that once energy prices stabilize, headline inflation is likely to bounce right back up."
Fisher said considering future inflation is as important as past inflation, or in other words "it's inflation's medium-term trend that matters."
Since monetary policy operates with a lag, if the Fed waits for full employment, it would "then have to raise rates sharply, I believe it will shock the economy and invite an adverse reaction," he said, advocating "early and gentle interest rate increases as we approach full employment."
"[E]very single time the Fed has waited for full employment to be achieved before starting to withdraw accommodation, it has ended up driving the economy into recession," he said. "When policymakers get too clever by half, the public pays a steep price."
Fisher also took exception to the "audit the Fed" bill. The Federal Reserve is audited, the Federal Open Market Committee publishes a statement right after it meets, releases minutes of its meetings and subjects its chair "to a no-holds-barred press conference on a quarterly basis."
Those looking to audit the Fed, he said, "simply find it convenient to create a bogeyman out of an entity that does its job efficiently."
Noting that he will be retiring from the Fed, Fisher made several suggestions, including simplifying the way Fed officials speak. "[W]e at the Fed need to learn to speak English, rather than 'Fedspeak.'"
Another issue he addressed if the "concern of many who feel that too much power is concentrated in the New York Fed." He suggested rotating the vice chair of the FOMC, now held by the president of the Federal Reserve Bank of New York. "The purpose of the FOMC is to decide policy and to instruct the New York trading desk to implement it by managing the Fed's System Open Market Account and short-term trading operations. Having the New York Fed president as the FOMC's vice chair gives the appearance of a conflict of interest. To correct this, I would rotate that position every two years to one of the other 11 Fed presidents."
As for regulation of systemically important financial institutions, or SIFIs, Fisher suggested "have each of the SIFIs supervised and regulated by Federal Reserve Bank staff from a district other than the one in which the SIFI is headquartered."
Fisher also proposed giving the Fed Bank presidents "an equal number of votes as the Washington-based governors, save the Chair," as opposed to the current system where the New York Fed has a permanent vote and the remaining 11 banks get four votes, with Cleveland and Chicago voting every two years and the rest voting every three years.
"This makes no sense to me," he said. "The population of the New York Federal Reserve district is smaller than that of the San Francisco, Atlanta, Chicago, Richmond and Dallas districts. The Cleveland district is much smaller than New York's, roughly equal to that of Kansas City, and only slightly larger than that of St. Louis, Boston and Philadelphia-each of which has 6 percent or less of the country's population."
The system appears based on which regions "were most prominent generations ago."
"The current voting schedule makes no sense to me. But I wouldn't necessarily change it simply to avenge the past. I would change it to balance out the division of power between the Federal Reserve Banks that are out in the field and among the people and businesses that operate our economy and have their own independent research staffs, and the Board of Governors, which is Beltway bound geographically and is briefed and guided by a single staff," Fisher said.
Fisher also suggested the FOMC chair meet the press after every meeting. "In effect, this means that any change in monetary policy can be made only at a quarter's end. In the parlance of economics, this injects some time-dependency into our deliberations when we should be guided in making policy strictly by the state of the economy, and take action on monetary policy when it is needed. I believe the Chair should hold a press conference after every meeting to explain the whys and wherefores of the policy decision taken by the committee. This would both add transparency and give the FOMC greater leeway in implementing policy. For the record, I have been arguing for this for years now."
