Despite sophisticated models, experience and theories, predictions about when the Federal Open Market Committee will begin to raise the federal funds rate is nothing more than the "best guesses" of participants, Federal Reserve Bank of Dallas President and CEO Richard W. Fisher said Friday.
"The participants in the FOMC have sophisticated econometric models, a deep knowledge of theory and a great breadth of experience to draw upon. But truth be told, however we dress up our forecasts as rigorous analysis, they are no more than the very best educated guesses of the superbly trained but still human staffs of the 12 Fed bankers and the active governors," Fisher told the Louisiana Bankers Association, according to prepared text released by the Fed.
Asset purchases should end later this year, and Fisher said he "will continue to vote for the pace of reduction we have undertaken, reducing by $10 billion per meeting our purchases and eliminating them entirely at the October meeting with a final reduction of $15 billion."
From the beginning, Fisher was a critic of quantitative easing, also known as QE3. "I doubted its efficacy and was convinced that the financial system already had sufficient liquidity to finance recovery without providing tinder for future inflation," he said. "But I lost that argument in the fall of 2012, and I am just happy that we will be rid of the program soon enough."
While Fisher may have liked to end QE3 sooner, he said, the reality is "We juiced the trading and risk markets so extensively that they became somewhat addicted to our accommodation of their needs," therefore tapering at $10 billion a month became "the prudent course of action."
With QE3 winding down, the Fed has started to focus on "when and how to 'normalize' monetary policy." "It raises questions, for example, about whether we should focus on the federal funds rate, which has been our traditional fulcrum, or some other measure, such as the rate we pay on excess reserves or that we pay on overnight reverse repos or some mix thereof. You can expect to hear more about this as time passes," he said.
Fisher said the quarterly Summary of Economic Projections "has become something of a phenomenon among analysts preoccupied with the entrails of policymaking and has taken on a life of its own."
However, he warned against relying too much on the SEP, since "it is a flawed tool." In addition to being the "best guesses" of participants, the roster of voters changes. And while "the Fed has a remarkable assembly of the best economic thinkers on the planet," none are seers or "possess Nostradamus-like insight."
Also, some discussion has been made to enhancing the SEP, including identifying who is predicting rate increases when, or just offering a median of the responses. "But neither of these approaches would do anything to enlighten the markets as to the views of future voters, nor would they overcome the underlying problem with date-based forward guidance."
The SEP has "some merit," Fisher said, "if only to give markets insight into how the central bank might react under different circumstances." But, he noted, "until two meetings ago, we used an unemployment figure of 6½ percent as a point sometime after which we would begin to consider pulling back on monetary accommodation, then decided this wasn't quite the ticket."
Fisher expects the Fed to refine its communications, with Chair Janet Yellen using "her press conferences to explain what simply cannot be communicated with a series of dots or within the statement we release after each meeting."
