NEW YORK – No decision will be made on a second round of quantitative easing, and none will be made until the Federal Open Market Committee meets on November 3, and the outcome of that meeting “is yet to be determined,” Federal Reserve Bank of Dallas President and CEO Richard W. Fisher said Tuesday.
Between now and the, new data, including the Beige Book, could lead members to reassess their positions, Fisher told the New York Association for Business Economics, according to prepared text of his speech, which was released by the Fed.
“You should bear this in mind given the recent speculation about the prospect for further quantitative easing or the shape and nature of forward policy guidance: no decisions have been made on these fronts and will not be made until the committee concludes its deliberations at its next meeting on Nov. 3,” he said.
But, Fisher repeated, “the efficacy of further accommodation using nonconventional policies is not all that clear.”
Turning to economic specifics, Fisher said real inventory accumulation accounted for roughly three-fifths of the 3% growth in real GDP from the second quarter of 2009 to the second quarter of 2010. “With inventories now better aligned with sales,” he said, “it is doubtful this variable will provide much economic propulsion in the coming quarters.”
Given the weak recovery, consumption and nonresidential fixed investment are the only areas that can fuel expansion, and “there is no reason to believe that growth will be notably strong, though the latest retail numbers surprised to the upside despite the warm weather, which typically retards fall sales. Residential investment, meanwhile, was an outright drag on growth last quarter, reflecting the hangover from expiring tax incentives; now, the foreclosure debacle has added a serious wrinkle to the potential for a clearing of that crucial market.”
Fisher sees third-quarter growth slightly above 2%, “with a gradual rate of acceleration to what would best be described as moderate growth after that,” a pace he called “stall speed.”
With sluggish growth, job creation will be so small it won’t cut the jobless rate “significantly in the foreseeable future,” he said. “If we cannot generate enough new jobs to sufficiently absorb the labor force over the intermediate future, we cannot expect to grow the final demand needed to achieve more rapid economic growth.”
If, Fisher contended, policymakers “put together a credible plan for deficit reduction that does not choke off growth, further accommodation might not even be needed. If job-creating businesses are more certain about future policy and are satisfactorily incentivized, they are more likely to take advantage of low interest rates, release the liquidity they are hoarding and invest it robustly in hiring and training a workforce that will propel the American economy to new levels of prosperity. This would render moot the argument for QE2, or a second round of quantitative easing.”
When analyzing the costs of further stimulus, Fisher said, “we will need to bear in mind that one cost already incurred in the process of running an easy-money policy has been to drive down the returns earned by savers, especially those who do not have the means or sophistication or the demographic profile to place their money at risk further out in the yield curve or who are wary of the inherent risk of stocks.”
“Moreover, driving down bond yields might force increased pension contributions from corporations and state and local governments, decreasing the deployment of monies toward job maintenance in the public sector,” he said. “Debasing those savings with even a little more inflation than what is above minimal levels acceptable to the FOMC is also unlikely to endear the Fed to these citizens. And if ¯ and here I especially stress the word ‘if’ because the evidence is thus far only anecdotal and has yet to be confirmed by longer-term data ¯ if it were to prove out that the reduction of long-term rates engendered by Fed policy had been used to unwittingly underwrite investment and job creation abroad, then the potential political costs relative to the benefit of further accommodation will have increased.”
