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Fischer Says Europe, Not U.S., Is Biggest Risk to Global Economy

Europe remains the biggest risk to the global economy even as the fiscal gridlock in Washington and ambiguity about the direction of U.S. monetary policy have taken center stage, according to Stanley Fischer, the former governor of the Bank of Isreal.

“I think that the U.S. will get through both these problems, possibly quite quickly, and that the European issues still need to be resolved,” Fischer, now a distinguished visiting fellow at the Council on Foreign Relations, said in an interview with Sara Eisen on Bloomberg Television. The situation in Europe is “very complicated,” he said.

The inability of the Obama administration and Congress to reach a compromise on a budget for the fiscal year that began on Oct. 1 led to the first government shutdown in 17 years, and the threat remains that, by the end of next week, the U.S. will exhaust ways to remain below its borrowing limit. Federal Reserve officials also surprised investors at their meeting last month by refraining from scaling back bond purchases.

“This is a remarkable period in that both monetary policy and fiscal policy in the United States are at the center of uncertainty in the world, and about the world economy, and that is an extraordinary situation,” Fischer said. “This was usually the country you could rely on.”

The partial federal shutdown, coupled with imminent debt-ceiling deadline, is making the Fed’s job that much harder, he said. Though policy makers were right not to taper last month amid lackluster economic growth, the Fed needs to dial down asset purchases “pretty soon,” Fischer said.

Fed Outlook

“They need to get data and to get evidence that, in fact, the economy is strengthening,” he said. “The numbers they really look at, the employment reports, are not being produced at the moment, so I don’t know how they’re going to deal with that. It may mean they wait until December, when one hopes the government is well open for quite a long time and has dealt with the backlog of data.”

Even after the fiscal impasse in the U.S. is resolved, Janet Yellen, President Barack Obama’s nominee to lead the Fed after Chairman Ben S. Bernanke’s term ends in January, has “got a very tricky road” ahead, Fischer said.

“She’s extremely competent, extremely able,” he said of Yellen, whose nomination came as finance officials from around the world gathered in Washington for annual meetings of the International Monetary Fund and World Bank.

“They’ve got to navigate the tapering, they’ve got to navigate their way out of this period of extraordinary monetary policy and I’m pretty sure she’ll manage it well,” Fischer said.

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