–Fed to Tolerate Neither Accelerating Inflation Nor Deflation

WASHINGTON (MNI) – Economic growth is likely to remain below 3% for
a “prolonged period,” Dallas Federal Reserve President Richard Fisher
said Thursday, with slow and “bumpy” improvement in jobs — but without
a second downturn.

Fisher, speaking to the Greater San Antonio Chamber of Commerce,
blamed excessive uncertainty about future government regulations for
what he called the economy’s “defensive crouch.”

“Capitalism works best when people take sensible, calculated risks
in innovating and conducting normal economic activity,” he said. ”
Uncertainty and risk are natural parts of business — capitalists
handicap and deal with them every day.”

“However,” he continued, “excessive uncertainty hinders one’s
ability to even calculate the odds of potential outcomes — especially
when that uncertainty involves irreversible decisions with long-term
implications.”

Fisher said that the 25 to 30 business leaders he surveys before
every FOMC meeting have told him that they feel public officials are
acting “in a capricious manner that makes long-term planning difficult,
if not impossible.”

“So they are calling time-outs and heading to the sidelines while
they wait for the referees to settle on the rules of the game,” he said.

On the overall recovery, Fisher repeated that growth “is no longer
being aided by the inventory correction” and software and equipment
purchases “are closer to catching up with demand.” Weak manufacturing
growth and a “dyspeptic housing sector” along with consumer anxiety
“point to a slightly weaker national outlook.” Growth from the first
quarter on is “likely to fall below 3 percent for a prolonged period.”

For the Fed, the problem is that “no amount of further monetary
policy accommodation can offset the retarding effect of heightened
uncertainty over the fiscal and regulatory direction of the country.” he
said.

Even the current amount of accommodation may be rendered less
effective “if private sector operators were to conclude that the Federal
Reserve has become politically pliable and is prone to substituting such
accommodation for fiscal discipline.”

It’s not only the raft of new regulations to be decided in the next
year and a half — to implement the financial regulatory reform law —
but the delay in making long-pending decisions, he said.

“Policymakers. for example, have had nine full years to decide the
fate of the bush tax cuts but have yet to do so,” he said. This means a
host of tax rates, including income taxes, estate taxes, capital gains
taxes and dividends tax remain uncertain, with implications for business
and household financial decisions.”

Future health-care costs under the new law in that area, oil
depreciation allowances and tax breaks, Medicare reimbursement
decisions, payroll tax percentages for Subchapter S corporations and
other provisions are uncertain.

The huge and still growing size of the national debt might suggest
gathering inflation is not far away. But Fisher emphasized, “We at the
Fed cannot and will not monetize the debt.”

Fisher also said that the Fed is “absolutely committed to its goal
of achieving price stability, and “neither inflation nor deflation will
be tolerated.”

Fisher acknowledged that the large size of the Dodd-Frank Wall
Street Reform and Consumer Protection Act means that “what we don’t know
looms especially large.” The Fed along must come up with new rules and
regulations in “close to 20 instances” in the law, without including
those cases in which the Fed must act in conjunction with another
regulatory agency.

“This is not the best time for added uncertainty,” Fisher said.
“Yet uncertainty reigns.” As regulators and legislators provide more
clarity, “a major roadblock to economic growth will be removed.”

Meanwhile, he said, the Fed should continue to emphasize its
commitment to price stability and maximum sustainable employment. “We
have worked hard to earn the respect of the marketplace and of the
nation, and we dare not risk it at a time when there is so much
uncertainty, elsewhere.”

But “until business operators are provided the clarity they need,
they will continue to hoard their cash, limit their payrolls and
constrain investment in new plant and equipment — non of which provides
hope for the unemployed or will put us on a more forceful path to
recovery,” he said.

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

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