By Brai Odion-Esene
WASHINGTON (MNI) – Despite recent speculation, officials within the
Federal Reserve continue to debate whether it should engage in further
monetary accommodation, Dallas Federal Reserve President Richard Fisher
said Thursday, and the outspoken Fed official argued that a lot of what
ails the economy can be fixed by removing fiscal and regulatory
uncertainty.
“There are limits to what monetary policy can accomplish if fiscal
policy blocks the road,” Fisher argued.
In remarks prepared for the Economic Club of Minnesota, Fisher also
warned that, in light of the recent decision by the Bank of Japan in
favor of a bond buying program, any action by the Fed along similar
lines raises “the specter of competitive quantitative easing.”
Fisher, who will be a voter on the Federal Open Market Committee
next year, said he shares the concerns other Fed officials have about
the rate of unemployment but as yet, “the efficacy of further
accommodation at this point has yet to be established.”
Fisher argued that unlike the height of the financial crisis in
2008, when liquidity evaporated and the central bank had to revive the
flow of credit, “Today there is abundant liquidity in our economy.”
“If current dramatically high levels of liquidity and low interest
rates are not being harnessed to add to payrolls or expand capital
expenditures, would driving interest rates further down and adding
further liquidity to the system through Fed purchases of Treasury
securities induce U.S. businesses and consumers to get on with spending
it?” he asked.
Credit availability does remain a challenge for small businesses,
Fisher acknowledged, but it remains unclear whether broad monetary
actions will alleviate them. Government action could be the answer, he
said, suggesting it might be more appropriate, perhaps, for the Treasury
to undertake a targeted fiscal initiative to improve credit availability
to small businesses.
On the other hand, capital is fairly abundant for mid- and
large-sized nonfinancial firms in the U.S., he continued, making it
uncertain how much they would benefit from lowering Treasury interest
rates.
So if the system is flush with liquidity, why isn’t that
translating into higher capital spending and more rapid rise in
employment levels?
“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.,” Fisher said.
Instead, he added, most business leaders remain fixated on driving
productivity and lowering costs.
And Fisher warned that the uncertainty over future tax rates and
regulations, together with an aggressive shift towards productivity
enhancements, “does not bode well for a rapid diminution of unemployment
and the concomitant expansion of demand.”
Although some may argue that the Fed could spur some job creation
by easing monetary conditions further, Fisher countered that any
potential benefits would be impeded by the “fiscal incontinence” of
Congress.
“The reality of fiscal and regulatory policy inhibiting the
transmission mechanism of monetary policy is most definitely present and
is vexing to monetary policy makers,” he said, “It is indisputably a
significant factor holding back the economic recovery.”
If the fiscal and regulatory authorities are able to dispel the
“angst” that businesses are reporting, Fisher argued further
accommodation might not even be needed.
If businesses are more certain about future policy and are
satisfactorily incentivized, he said, they are more likely to take
advantage of low interest rates, release the liquidity they have been
keeping in reserve and invest it “robustly” in hiring.
The key is to remove or reduce any uncertainties that prevent
businesses from responding to an increase in final demand, Fisher said.
“I think most all would consider this to be a far more desirable outcome
than being saddled with a bloated Fed balance sheet.”
Fisher also warned of the possible political fallout if the Fed
were to engage in more quantitative easing. Already, having an easy
money policy has driven down the returns earned by savers, he said,
especially those without the means to place their money at risk
further out in the yield curve or who are wary of the inherent risk of
stocks.
And if evidence were to show that the reduction of long-term rates
brought about by Fed policy “had been used to unwittingly underwrite
investment and job creation abroad,” Fisher warned, then the potential
political costs relative to the benefit of further accommodation will
have increased.
Another risk that Fisher sees if the Fed engages in further easing
is tied to another developing country struggling to sustain its
recovery, Japan.
What has Fisher concerned are news reports indicating that Japan’s
announcement earlier this week of a new bond-buying program was done
“anticipating that the U.S. Federal Reserve will resume large-scale
purchases of U.S. Treasury bonds,” as well as strong domestic political
pressure to spur growth and restrain a rising yen.”
With fiscal policy stalling, indications are that central bankers
are preparing to pump in more liquidity to reflate their economies, and
that raises the specter of “competitive easing,” Fisher warned.
Facing the risk of slippery slope of quantitative easing that
reaches beyond just buying government bonds — or mortgage-backed
securities — any action the FOMC takes must be consistent with
long-term price stability “and not add to the nightmare of confusing
signals already being sent to job creators,” Fisher urged.
** Market News International Washington Bureau: 202-371-2121 **
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