By Steven Beckner

Fisher, a former official in the Carter and Clinton
administrations, prefaced those comments by citing the concerns he has
picked up from business contacts about the federal deficits, taxes and
government policies in a variety of areas. Similar expressions of
concern have been made by other Fed officials in recent months and were
mentioned prominently in the minutes of the Aug. 10 FOMC meeting,
released Tuesday.

Fisher said “the prevailing sentiment (in the business community)
is that politicians and officials who craft and enforce taxes and rules
have been doing so in a capricious manner that makes long-term planning,
including expanding payrolls, difficult, if not impossible.”

Because of their uncertainty, Fisher said firms have “continued to
meet growth in demand for their products largely through productivity
gains and by increasing existing employees’ hours.” He said “this does
not bode well for job creation here at home.”

Continuing in the same vein, Fisher said, “The retarding effect of
heightened uncertainty over the fiscal and regulatory direction of the
country makes it difficult to kick-start the transmission mechanism of
the economy.”

Given very low interest rates and ample bank reserves, “one might
reasonably posit that the gas tank of those who have the capacity to
hire — the private-sector businesses of America — is reasonably full,”
he said. “And one might conclude that the Fed, having cut the cost of
interbank overnight lending to near zero and used quantitative easing to
coax the entire yield curve downward, has driven the cost of gas to
virtually nil for both the government and those businesses that are
creditworthy.”

But he said “the issue now is how that fuel might be released so as
to propel the engine of job creation and drive a happier pace of
economic growth.”

So Fisher indicated his will be a vote for caution as the FOMC
makes policy next year.

“We are the central bank of the most powerful and important economy
in the world,” he said. “We bear significant responsibility as the
lender of last resort. We have the power to create money. This is an
awesome power. We are not afraid to use it.”

But he added, “It requires that we discharge our duties
deliberately. If we fail to act when action is required, we might be the
agent of economic destruction. And if we overreact, we can be equally
destructive. Which means we must at all times carefully weigh the costs,
as well as the benefits, of any and all actions we take.”

“And as the efficacy of our actions depends upon confidence in our
integrity, we must always bear in mind that our word is our bond,” he
continued. “We cannot risk either overpromising or under committing to
executing the duties than have been assigned to us.”

Calling himself an “inflation hawk,” Fisher said he and his
colleagues are committed to “keeping inflation under control.” But he
said, “it is clear that inflation is not the immediate problem facing
the nation.”

Echoing Bernanke, he noted, “inflation has declined to a level that
is at the low end of the 1.5 to 2% range that the participants in FOMC
deliberations consider conducive for healthy economic growth over the
long run.”

Neither did he see much risk of further disinflation, much less
deflation. He drew on the Dallas Fed’s own “trimmed mean” inflation
index to make his point.

“In studying the entrails of the price index for consumer
expenditures, at present we see neither an impulse toward inflation nor,
despite much talk among economists and political pundits, toward
deflation,” he said. “Trimmed mean inflation rates recorded over the
last three months have been slightly above the rates we saw in early
spring, and the index’s six- and 12-month inflation rates have been
stable over the past three months.”

“Within the core PCE index, rates of price change for two of the
largest components — rent and owners’ equivalent rent — have lately
turned from falling to rising,” he observed. “That change of direction
alone should, in the near term, provide some restraint against further
disinflation in core PCE.”

“In short, I concur with Chairman Bernanke’s assessment that ‘the
risk of either an undesirable rise in inflation or of a significant
further disinflation seems low.'”

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** Market News International Washington Bureau: 202-371-2121 **

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