NEW YORK – The economy’s ills are not the result of lack of liquidity or the need to ease monetary policy, and that’s the reason Federal Reserve Bank of Dallas President and CEO Richard W. Fisher gave for casting a dissenting vote at the recent Federal Open Market Committee meeting.
“Nonmonetary factors, not monetary policy, are retarding the willingness and ability of job creators to put to work the liquidity that we have provided,” Fisher said in a speech in Midland, Texas, Wednesday, according to prepared remarks released by the Fed.
Liquidity is “abundant,” providing the financing for “economic expansion and job creation in America,” he said. Excess “bank reserves are waiting on the sidelines to be lent to businesses.”
“I do not believe it wise to commit to more than [an extended period], or to signal further accommodation, when the cheap and abundant liquidity we have made available is presently lying fallow, and when the velocity of money remains so subdued as to be practically comatose,” he said.
Fisher pointed out that while he considered an inflation hawk, he actually is “constantly preoccupied with price stability.” Inflation is in check, and the most recent Dallas Fed trimmed mean analysis of inflation “its softest reading of the year.”
Some companies have started hiking prices to counter rising costs, but weak demand is “beginning to temper” significant pass-throughs to consumers, he said.
“My concern is with the transmission mechanism for activating the use of the liquidity we have created, which remains on the sidelines of the economy,” Fisher explained. He added, businesses “simply cannot budget or manage for the uncertainty of fiscal and regulatory policy. In an environment where they are already uncertain of potential growth in demand for their goods and services and have yet to see a significant pickup in top-line revenue, there is palpable angst surrounding the cost of doing business.”
The recent debate over the debt ceiling “with the leadership of the nation ¯ Republicans and Democrats alike ¯ and every talking head in the media making clear hour after hour, day after day in the run-up to Aug. 2 that a financial disaster was lurking around the corner” scared consumers from buying.
“Small wonder that, following the somewhat encouraging retail activity reported in July, the Michigan survey measure of consumer sentiment released just recently had a distinctly sour tone.”
But, the debate ended in an agreement that clarified nothing, “except that there will be undefined change in taxes, spending and subsidies and other fiscal incentives or disincentives,” he said. “The message was simply that some combination of revenue enhancement and spending growth cutbacks will take place. The particulars are left to one’s imagination and the outcome of deliberations among 12 members of the Legislature.”
With that uncertainty and the Fed vowing to keep credit cheap for two years, Fisher asked, “what incentive do I have to invest and expand now? Why shouldn’t I wait until the sky is clear?”
“No amount of monetary accommodation can substitute for that needed clarity,” he said. “In fact, it can only make it worse if business comes to suspect that the central bank is laying the groundwork for eventually inflating our way out of our fiscal predicament rather than staying above the political fray—thus creating another tranche of uncertainty.”
Also, Fisher said, he was concerned that “ just by tweaking the language the way the committee did,” it might appear that the FOMC was planning to “allow the stock market to rise significantly without tightening monetary policy, but will ease monetary policy whenever there is a stock market correction.” He added, “My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors.”
Pointing to economic growth in Texas, Fisher said, it shows “private sector capital and jobs will go to where taxes and spending and regulatory policy are most conducive to growth.”
Congress must determine how to cut its deficits and public debt accumulation in a way “that is competitive with others who seek access to our money, and do so in a manner that does not pull the rug out from under the meager recovery we are experiencing.”
Fisher said he believes “fiscal misfeasance in Washington” is restraining the economy. “Pointing fingers at the Fed only diminishes credibility ¯ the ugly truth is that the problem lies not with monetary policy but in the need to construct a modern, appropriate set of fiscal and regulatory levers and pulleys to better incentivize the private sector to channel money into productive use in expanding our economy and enriching our people.”
