Fisher on the rate rise, financial excess, and political pliancy (Part 8 of 8)
Dallas Fed’s Richard Fisher discusses the Fed avoiding appearing “politically pliant”
“We must all, Federal Reserve principals and staff, and ordinary citizens alike, continue to protect the independence of the Fed and its ability to be a political nuisance,” said Dallas Fed Chief, Richard Fisher speaking at the University of Southern California on Wednesday, July 16. In his speech titled “Monetary Policy and the Maginot Line,” he mentioned that the Fed should be wary of being termed “politically pliant.”
Fisher’s German anecdote
Discussing an anecdote from the time the German Reichsbank was formed, Fisher cited the example of Chancellor Bismarck’s adviser mentioning that due to divergence in the goals of politicians and economists, there would be times when “too independent a central bank would be a nuisance.” According to Fisher, political considerations overrode economic ones, leading to World War I and hyperinflation in Germany.
The Fed and the Federal Open Market Committee (or FOMC) must avoid actions that appear politically motivated. Fisher was referring to continued monetary stimulation that may lead to higher than mandated levels of inflation, in a bid to encourage economic growth. He said that the Fed must avoid coddling inflation in “order to compensate for the inability of fiscal and regulatory policymakers in the legislative and executive branches to do their job.”
Market participants closely watch the Fed’s actions and the views of Fed officials and policymakers. The monetary policy decisions at FOMC meetings have bearing on both fixed income and stock (VIG) markets. Fixed income markets including Treasuries (SHY), high-yield and investment-grade debt, and mortgage-backed securities, among others, are particularly sensitive due to the implications of monetary policy on interest rates.
Fed monetary policy decisions also have an impact on overseas emerging market stocks (EEM) and bond (EMB) funds as well as stock (EFA) and bond markets in developed countries. In the taper tantrum following Ben Bernanke’s statement regarding QE3, emerging markets experienced large outflows in the middle of 2013. In January, outflows from emerging and frontier markets continued as the Fed commenced tapering of monthly asset purchases.
To read more about tapering and its impact on financial markets, please read the Market Realist series, A must-know investor’s guide to the Fed’s asset purchase tapering.
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