Fed’s Fisher Says Mordant Fiscal Predicament Curbs Growth
Federal Reserve Bank of Dallas President Richard Fisher said the “mordant fiscal predicament” of the U.S. government is weighing on growth and preventing companies from hiring.
“The great inhibitor of job creation is the uncertainty over taxes and spending and regulation that plagues businesses,” Fisher said in the text of remarks given in Washington today. “Even if businesses do not like the rules that govern their behavior, knowing those rules with certainty gives them something to plan around and navigate through. Presently, they haven’t the foggiest idea what the rules will be.”
The Fed last month added to its record monetary easing to try to boost an economy vulnerable to the sovereign debt crisis in Europe and the so-called fiscal cliff in the U.S., the more than $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress acts. The Congressional Budget Office said in an Aug. 22 report that fiscal tightening of that magnitude could cause a recession.
The Federal Open Market Committee voted to buy $40 billion of mortgage bonds a month and extend its horizon for record-low interest rates through at least the middle of 2015.
Fisher, who isn’t a voting member of the FOMC this year, told reporters after his speech that he wasn’t in favor of the stimulus step and that it’s “too early to know” if the third round of asset purchases is working to spur growth.
“The fix lies not within the purview of the Federal Reserve,” Fisher said at the Cato Institute conference, “Europe’s Crisis and the Welfare State: Lessons for the United States.” “The fix lies solely in the hands of a government that has the power to shape taxes and spending programs to incent businesses to go out and hire rather than ball up into a defensive crouch, or worse, go elsewhere in the world.”
The Fed said today that the U.S. economy was expanding “modestly” last month, supported by improvements in housing and auto sales, even as the labor market showed little change.
“Consumer spending was generally reported to be flat to up slightly since the last report,” the Fed said in its Beige Book business survey, which is based on accounts from the 12 district Fed banks. Conditions in manufacturing were “somewhat improved,” according to the report, which provides anecdotal evidence on the health of the economy two weeks before the FOMC meets in Washington on Oct. 23-24.
The Beige Book provides support for Fed Chairman Ben S. Bernanke’s view that economic growth isn’t strong enough to bring about a quick healing of the labor market. A Labor Department report last week showed that while the unemployment rate unexpectedly fell in September, payroll growth slowed.
Fisher told reporters after the speech that he’s skeptical policy makers will be able to link monetary policy to specific economic indicators.
“It’s something that merits discussion but will be very hard to execute,” he said. “Even if I were convinced, which I’m not, I’m not sure how you come up with a specific number.”
“The private sector and American business community are poised to expand,” Fisher said. “But they will not do so as long as we have a government that cannot resist the temptation to devise a politically convenient patchwork instead of laying out a convincing, reliable, long-term program that job creators and consumers can count on and plan around.”
Fisher said that Fed policy has left American companies with “money burning a hole in their pockets” and that there’s “more than enough fuel in reserve to finance a prolonged period of job creation.” He said he is concerned that the central bank has “done far more than what was required” and may face “difficulties” when trying to withdraw its stimulus.
He said in response to audience questions after his speech that while inflation isn’t presently a problem, the central bank’s unprecedented monetary easing may lead to rapidly accelerating prices. The Fed should have a single mandate focused on price stability, he said.
“I do worry personally -- and I can only speak for myself -- that if we continue down this path of trying to satisfy the second part of our mandate we could set the basis for inflation later on, particularly if we’re not able to manage the exit,” Fisher said.
The Dallas Fed chief told reporters he’s concerned that the central bank won’t be able to “exit gracefully” given it’s “never been in this place before at such size and such complexity.”
Adding to its long-term bond holdings also increases the risk the Fed will lose money on its portfolio, Fisher said.
“Will Congress remember if we take a loss on some of our fixed income holdings?” Fisher said. “We’ve been remitting over $70 billion a year now for a couple of years. It’s nice to think they’ll remember,” though “I doubt it. Most congressmen have the memory of fish, OK, fish have no memory.”
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