By Steven K. Beckner

DALLAS (MNI) – Dallas Federal Reserve Bank President Richard Fisher
made clear Monday that he is disinclined to support further monetary
stimulus measures at the Fed’s monetary policy meeting next week.

Fisher, a voting member of the Fed’s policymaking Federal Open
Market Committee, said the Fed can and should use its regulatory
authority to encourage more lending but said its monetary policy cannot
offset fiscal, regulatory and European uncertainties which he said are
discouraging business expansion.

Speaking at the National Association for Business Economics annual
convention, Fisher said Americans are in the grips of a “pervasive
anguish” and are “in a defensive crouch,” and he said he wants to reduce
unemployment as much as any of his colleagues. But he said it is up to
the fiscal and regulatory authorities to ease the path for growth and
for households and businesses to take the initiative.

The Fed has already “filled the gas tanks,” he said. Now it is up
the American people to “step on the (gas) pedal.”

Far from helping the economy, Fisher implied that the FOMC’s latest
measure — extending its zero interest rate policy for another two years
— was counterproductive. It gave firms an incentive to delay borrowing,
he said.

Fisher was one of three Federal Reserve Bank presidents who
dissented on Aug. 9 when the FOMC reaffirmed its zero to 25 basis point
federal funds rate target but lengthened and specified its “forward
guidance” on the key overnight rate.

“The Committee currently anticipates that economic conditions —
including low rates of resource utilization and a subdued outlook for
inflation over the medium run — are likely to warrant exceptionally low
levels for the federal funds rate at least through mid-2013,” the Fed
said in its policy announcement. Fisher was joined in dissent by
Narayana Kocherlakota of Minneapolis and Charles Plosser of
Philadelphia.

Explaining his own dissent, Fisher said, “I felt that the benefit
of stating that the FOMC anticipates economic conditions were likely to
warrant holding the base rate at ‘exceptionally low levels … at least
through mid-2013″ was outweighed by the risk that such an action would
be viewed as a commitment.”

What’s more, while “the majority of the FOMC felt that anchoring
the fed funds rate where it is for two years would assure markets and
incent business activity,” Fisher said he “felt doing so would, instead,
give job-creating companies, particularly small- and medium-sized
businesses, an incentive to further delay borrowing for expansion, given
that they feel stymied both by anemic demand and discomfort with how
they are taxed and regulated.”

“It seemed to me that signaling that money would likely remain
cheap for two years or more would hardly induce those with access to
credit to borrow to expand and add to payrolls now,” he added.

Fisher said “this discomfort was compounded for me by the confusion
and disorienting uncertainty arising from the debacle of the debt
ceiling negotiations that took place shortly before the FOMC meeting.”

“Moreover, it struck me that such a stance risked creating a
perception that the FOMC might be a little bit trigger-happy in reacting
to short-term developments in the securities markets; that we were
collectively signaling there was a readily available ‘Bernanke Put.'”

Warning that “short-term fixes” can have bad long-term
consequences, Fisher noted that “the press and the Street are currently
brimming over with assumptions about new fixes.”

He listed “further expansion of our balance sheet; an ‘Operation
Twist,’ wherein we lengthen the duration of our portfolio so as to drive
down already historically low nominal intermediate and longer-term rates
(rates that are below 2% all the way through the 10-year range and have
negative yields in real terms); reducing from 25 basis points to zero
what we pay on excess reserves (though the banks that deposit these
reserves with us reportedly aren’t able to identify a sufficient number
of willing borrowers or believe they need a cushion to deal with
regulatory concerns).”

None of these appeal to Fisher, he strongly implied.

“The Federal Reserve has done a great deal to reverse the situation
that we confronted in 2008 and 2009,” he said. “We have filled the
gas tanks of the economy with affordable liquidity. What is needed now
is for employers to confidently step on the pedal and engage the
transmission that will use that gas to move the great job-creating
machine of America forward.”

If Americans lack the confidence to “step on the pedal” it is not
because of monetary policy, he said, but rather because of two other
major sources of uncertainty.

“One is domestic,” he said. “It arises from the fiscal and
regulatory authorities. Congress and the president must put together a
program that will encourage growth in final demand as soon as possible
by incentivizing private businesses to do what they do best to make
growth in final demand possible: Expand investment, hire workers and go
about the business of lifting the income and net worth of the American
people.”

“The second source of uncertainty has largely emanated from the
European debt crisis,” he went on. “The sovereign debt crisis has
reintensified, as you are all aware, and risk premiums in bond and stock
markets are rising once again.”

There is very little the Fed can do to overcome the retarding
effects of these uncertainties in Fisher’s view.

“It is hard for domestic monetary policy to offset such effects,
both because they are external in nature and because it is unclear how
long they will dampen the U.S. recovery,” he said, adding that the
Fed can help in other ways.

“This is not to say that the Federal Reserve has no role to play,”
he said. ” Our franchise includes assuring an efficient financial
transmission mechanism … . It is incumbent on the Fed and other bank
regulators to reduce the regulatory burdens that are inhibiting —
indeed, overwhelming — community bankers whose business it is to lend
to creditworthy small businesses.”

“This is a supervisory and regulatory matter, not a matter of
general monetary policy,” he continued. “My point is that the Fed needs
to examine and perfect the transmission mechanism under its purview just
as intensely as it looks at monetary policy per se.”

Fisher stressed that “the central bank cannot carry the load
alone … . Indeed, there is great danger in any temptation to do so.”

In fact, he favorably cited The Economist’s warning that “there is
a moral hazard in central-bank activism. It risks encouraging
governments to sit back and let others do the work that they find too
difficult themselves.”

Fisher didn’t totally rule out supporting some sort of additional
monetary medicine. “If I believe further accommodation or some jujitsu
with the yield curve will do the trick and ignite sustainable aggregate
demand, I will support it.”

“But the bar for such action remains very high for me until the
fiscal authorities do their job, just as we have done ours,” he added.
“And if they do, further monetary accommodation may not even be
necessary.”

** Market News International **

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