NEW YORK – The economy is progressing, and “more things are moving in the right direction than in the wrong direction,” according to Federal Reserve Bank of Dallas President and CEO Richard W. Fisher, which is why he is against additional quantitative easing.
“General economic conditions are improving slightly and are expected to continue doing so,” Fisher told an audience in San Antonio, according to prepared text of his remarks, which were released by the Fed. “The risk of a double dip in economic activity has lessened, as has the risk of deflation. Financial speculation and excess, however, is beginning to raise its hoary head.”
The steady numbers seen in the Trimmed Mean PCE calculation of inflation, Fisher said, mean the underlying trend in inflation appears to be holding steady at a low rate.
With demand at low levels and the inability to raise prices, firms have targeted increased productivity, using whatever money is available to fund productivity enhancement rather than hiring or on capital expenditures.
Fisher also said he was concerned that money market funds haven’t been getting inflows, as have “high-risk to low-risk bond vehicles, taxable and nontaxable, domestic and external, fixed and floating rate, and, of course, commodities.”
“I fully understand the theoretical impulse to drive long-term interest rates to lower levels in hopes of stimulating loan demand and challenging the propensity for economic actors to hoard rather than invest,” he said. “Given that foreign exchange markets react to interest rate differentials between countries, one effect of engineering lower rates would be to devalue the dollar, presumably to create demand for exports. The ultimate objective would be to advance final demand, generate employment for American workers and revive output.”
Noting that the U.S. is in “a liquidity trap,” Fisher said, “I think it worth noting that we already have low interest rates, and spreads against risk-free instruments are historically narrow. Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand. Loans are desirable when business see an opportunity for tapping credit markets to earn a return on investment that significantly outpaces the cost of credit and other risk factors. Even with the low rates that already prevail, businesses lack confidence that they will earn a superior ROI by investing so as to expand their domestic workforce, in comparison to what they might earn from alternative investments abroad or by buying in their stock or cleaning up their balance sheets.”
Consumers also are not borrowing because high unemployment rates make workers worry thy may not be able to meet these obligations in the future.
Liquidity is high. If it was insufficient, Fisher said, “I could understand the impulse to relieve that stricture. Further quantitative easing through additional asset purchases will surely increase the level of bank reserves, lower rates marginally and add more liquidity to markets while weakening the dollar. The more germane question is whether this works to the benefit of job creation and wards off financial excess.”
Fisher, who said he was skeptical about the benefits of further asset purchases, said one cost is the perception of taking a path of debt monetization. “And I worry that by providing monetary accommodation, we are reducing the odds that fiscal discipline will be brought to bear.”
Another problem is that further accommodation when the U.S. is not in crisis may create more expectations in the economy for “continued Federal Reserve purchases of Treasury securities as normal operating procedure.”
He added, “The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.”
“Monetary accommodation by itself, is not the answer to our current woes,” he said. “The Fed, as I see it, has taken a leap of faith that our political leaders will forge a sensible budgetary and regulatory path that incentivizes businesses to put to work the money the Fed is printing to invest in creating jobs for American workers while averting what the Stanford historian David Kennedy described in yesterday’s New York Times as `a looming fiscal apocalypse.’”
Without Congressional action, “the effect of quantitative easing will, in my view, simply result in financial speculation, further investment in more welcoming quarters abroad and, ultimately, in `super ordinary’ inflation,” Fisher said. “The FOMC is taking a calculated risk. If the Congress and the Executive fail to deliver, I believe the FOMC will have to consider changing course.”
