Fisher on the rate rise, financial excess, and political pliancy (Part 1 of 8)
Dallas Fed’s Richard Fisher discusses rate rise, financial excess, and political pliancy
Dallas Fed Chief, Richard Fisher spoke at the Annenberg School for Communication and Journalism, at the University of Southern California on Wednesday, July 16, about the risks in the Fed’s current accommodative monetary policy. In his speech titled “Monetary Policy and the Maginot Line,” he expressed concerns on “financial excess” and the risks to the economy by keeping monetary policy “too loose too long.”
By keeping monetary policy accommodative more than what current economic conditions warrant, the Fed risks damaging the economy and also being viewed as “politically pliant,” he said.
Fisher also outlined his take on monetary policy normalization, saying that the hike in the Fed funds rate could come in early 2015 or earlier, depending on economic conditions.
Financial stability risks posed by monetary accommodation
Addressing risks to financial stability has been receiving increased attention from Fed officials and policy makers in recent months. The rich valuations in farmland, stock markets, and certain sections of the bond market have raised concerns about financial market bubbles that pose systemic threats.
Fed Chair Janet Yellen, Federal Open Market Committee (or FOMC) vice-chairman Stanley Fischer, and Chicago Fed chief Charles Evans, are some of the Fed officials who have recently spoken about these risks to financial markets.
Expanding the Fed’s mandate to include financial stability as one of its mandates has also been discussed. The topic has attracted a range of views from policymakers.
What is accommodative monetary policy?
In the aftermath of the 2008 financial crisis and great recession of 2007–2009, the Fed lowered the Fed funds rate to near-zero levels and embarked on three rounds of quantitative easing (or QE). These measures would result in more liquidity in the market and lower interest rates. They were taken in a bid to revive economic growth and generate employment.
These have also resulted in the Fed’s balance sheet expanding to over $4 trillion currently, from a level of about $900 billion, pre-crisis. The enhanced levels could lead to future inflation. Accommodative monetary conditions have also led to certain market participants taking on excess risk in a bid to reach for yield, which has increased systemic risks.
Although the current round of QE3 is widely expected to end in October, the Fed has consistently indicated that it would keep the base rate low for a “considerable period” after monthly asset purchases end, as economic conditions warrant.
Richard Fisher’s take in upcoming FOMC meetings
According to Richard Fisher, the economy has reached its goals faster than the Fed expected and accommodative monetary policy has “overstayed its welcome.”
“I will be arguing at the upcoming FOMC meetings that while it is difficult to define ‘maximum employment,’ labor-market conditions are improving smartly, quicker than the principals of the FOMC expected. The commonly cited household survey unemployment rate has arrived at 6.1% a full six months ahead of the schedule predicted only four weeks ago by the central tendency of the forecasts of FOMC participants,” he said.
About Richard Fisher
Richard Fisher has been the head of the Federal Reserve Bank of Dallas since 2005. The Dallas Fed’s district includes Texas, northern Louisiana, and southern New Mexico. As one of the most hawkish Federal Reserve Bank chiefs, Richard Fisher has been a vocal opponent of the Fed’s open market purchases of Treasuries and agency-backed securities. Mr. Fisher is part of this year’s FOMC, and he’ll vote on policy.
For more on Mr. Fisher’s views on monetary policy, please read the Market Realist series, The Dallas Fed’s Richard Fisher shares key forward guidance.
Market participants closely watch the Fed’s actions and the views of Fed officials and policymakers. The monetary policy decisions at FOMC meetings impact fixed income (BND) and stock (SPY) markets. Fixed income markets including Treasuries (TLT), high-yield (HYG) and investment-grade (LQD) debt, and mortgage-backed securities, among others, are particularly sensitive due to the implications of monetary policy on interest rates.
In the next section, we’ll discuss Mr. Fisher’s views on dealing with financial instability risks.
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