By Steven K. Beckner
(MNI) – Dallas Federal Reserve Bank President Richard Fisher came
down squarely against additional quantitative easing on a Friday when
two other key Fed officials made clear they are leaning strongly in
favor of it.
Fisher, who will be a voting member of the Fed’s policymaking
Federal Open Market Committtee next year, said that, “barring an
unforseen shock” it is “unclear” to him whether providing additional
monetary stimulus would be effective in the face of tax and regulatory
uncertainties which he contended are a “significant” impediment to
recovery.
Earlier Friday, New York Fed President and FOMC vice chairman
William Dudley indicated he is ready to resume quantitative easing if
employment and inflation indicators don’t become more consistent with
the Fed’s objectives.
And Chicago Fed President Charles Evans said, “The size of the
unemployment gap, combined with the fact that inflation has been running
below the level I consider consistent with long-term price stability,
suggests that it would be desirable to increase monetary policy
accommodation to boost aggregate demand and achieve our dual mandate.”
Fisher took a starkly different position in opposition to
additional Q.E., arguing that fiscal and regulatory impediments to
growth would render it ineffective and that if those impediments are
removed more monetary stimulus could well be unnecessary.
Indeed, he warned, additional Q.E. could do real damage by eroding
the Fed’s credibility and intensifying existing uncertainty.
Showing none of the ambivalence that some of his colleagues have
displayed, Fisher went on at some length in speaking out against Q.E.,
despite a fairly gloomy outlook on growth and jobs.
After suggesting that speculation about forthcoming Fed action in
wake of the Sept. 21 FOMC statement is overwrought, Fisher asserted,
“And yet the efficacy of further accommodation at this point is not
crystal clear.”
For one thing, he questioned the need for the Fed to pump more
reserves into the banking system when exccess reserves already exceed $1
trillion and cash in corporate hands is “extraordinarily high.”
“In sharp contrast to the depths of the Panic of 2008, when
liquidity had evaporated and we stepped into the breach to revive it,
today there is abundant liquidity in our economy,” he said.
Although credit availability problems remain, especially for small
business, “it is unclear whether broad monetary actions will alleviate
them,” he said, adding that “it may be more appropriate for the Treasury
to undertake a targeted fiscal initiative to improve credit availability
to small businesses.”
“For mid- and large-sized nonfinancial firms, capital is fairly
abundant in America, and it is unclear how much they would benefit from
lowering Treasury interest rates,” he said.
Fisher asked, “If current dramatically high levels of liquidity and
low interest rates are not being harnessed to add to payrolls, would
driving interest rates further down and adding further liquidity to the
system through Fed purchases of Treasury securities induce businesses
and consumers to get on with spending it?”
He said he is wary of economists’ arguments that creating more
money would induce more lending and spending by increasing inflation
expectations and making it less attractive to hold depreciating money
balances.
The reality, according to Fisher’s soundings of business contacts
in his eleventh Fed district, is that “few are willing to commit to
expanding U.S. payrolls or to undertaking significant commitments to
expand capital expenditures in the U.S. other than in areas that enhance
productivity of the current workforce.”
“Without exception, all the business leaders I interview cite
non-monetary factors — fiscal policy and regulatory constraints or,
worse, uncertainty going forward — and better opportunities for earning
a return on investment elsewhere as inhibiting their willingness to
commit to expansion in the U.S.”
“Tax and regulatory uncertainty — combined with a now
well-inculcated culture of driving all resources, including labor, to
their most productive use at least cost — does not bode well for a
rapid diminution of unemployment and the concomitant expansion of
demand,” he said.
“The reality of fiscal and regulatory policy inhibiting the
transmission mechanism of monetary policy is vexing to monetary
theorists,” he went on. “And yet it seems to me to be a significant
factor holding back economic recovery.”
Far from very low interest rates helping the U.S. economy, Fisher
said he “wonder(s) if the monetary accommodation we have engineered
might not be working in the wrong places. Far too many of the large
corporations I survey report that the most effective way to deploy cheap
money raised in the current bond markets or in the form of loans from
banks, beyond buying in stock or expanding dividends, is to invest it
abroad where taxes are lower and governments are more eager to please.”
The Fed could also run the risk of building up an impression among
investors that it “doesn’t care about inflation.” If that view takes
hold, he asked, “might this not add to the uncertainty already created
by the fiscal incontinence of Congress and the regulatory and
rule-making ‘gexcesses’ about which businesses now complain?”
Past Q.E. has already imposed costs as well as benefits, Fisher
said, noting that it has driven down returns for savers who are not
sophisticated enough to earn higher returns on risker assets. Further
“debasing” savings could even have a “political cost” for the Fed, he
warned.
Fisher said it is appropriate, following the tenets of central
banking laid down by Walter Bagehot, for the Fed to expand its balance
sheet aggressively during a crisis, that is not now the case.
“While none of us are satisfied with the current pace of economic
expansion and job creation, presently it is not clear that conditions
warrant further crisis-like deployment of the Fed’s arsenal,” he said.
“Besides, it would be difficult to build a case that the main recipient
of further credit extensions, namely the U.S. Treasury, or borrowers
whose rates are based on historically low spreads over Treasuries, have
difficulty accessing the capital markets.”
So, Fisher continued, “it is not clear that the benefits of further
quantitative easing outweigh the costs…(B)arring an unforeseen shock,
I have concerns about the efficacy of further expanding the Fed’s
balance sheet until our political authorities better align fiscal and
regulatory initiatives with the needs of job creators.”
“Otherwise, further quantitative easing might be pushing on a
string,” he said. “In the worst case, it could flood the engine of the
economy with gas that might later ignite inflation.”
“Of course, if the fiscal and regulatory authorities are able to
dispel the angst that businesses are reporting, further accommodation
might not even be needed,” he added.
Fisher said he is not opposing Q.E. because he has a more upbeat
view of the economic outlook. Far from it.
He began by calling the pace of recovery “subpar’ and saying growth
is apt to be “insufficient to create the number of jobs the United
States needs to bring down unemployment.”
“If we cannot generate enough new jobs to absorb the labor force,
we cannot expect to grow final demand needed to achieve more rapid
economic growth,” he said.
** Market News International **
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