Richard Fisher on monetary policy: Where to from here? (Part 7 of 9)
The Dallas Fed’s Richard Fisher at the Asia Society
Fisher spoke at the Asia Society in Hong Kong on Friday, April 4, about “forward guidance” in monetary policy, which he described as “the subject du jour of central bankers.” It recently became a focus of discussion again in the U.S. after the Fed’s March FOMC meeting, when the Fed decided to go with “qualitative” rather than “quantitative” guidance regarding its future monetary policy statements. In this article, we’ll continue discussing Fisher’s take on the types of forward guidance that central banks give: Odyssean (clear-cut quantitative goal posts) or Delphic (qualitative without contingent commitments to specific goals).
Richard Fisher on Odyssean guidance
Fisher went on to say that commitment to specific goals, or Odyssean guidance, comes in lots of different “flavors and styles” and that “forward guidance isn’t necessarily helpful or wise just because it’s Odyssean.” He went on to say that commitment to a particular path for the Fed funds rate or to a time schedule for a lift in the rate wasn’t something he and many of his colleagues at the FOMC were interested in.
Richard Fisher on Minneapolis Fed President Narayana Kocherlakota’s stance
At least those commitments that tie to specified future economic goals enjoyed some support at the FOMC. Fisher said, “President [Narayana] Kocherlakota of the Minneapolis Fed, for example, has notably proposed that the committee promise to delay liftoff at least until either the unemployment rate reaches 5 1/2 percent or forecasted inflation hits 2 1/4 percent [provided longer-term inflation expectations remain well-anchored and possible risks to financial stability remain well-contained].”
Fisher went on to say that he personally believed that commitments—especially long-term commitments—aren’t always credible, firstly as it’s hard to bind policymakers, and secondly due to the difficulty in anticipating future economic developments. The further off a commitment is, the vaguer the interpretation. Due to this trend, the Fed reiterates its mandate at the end of each FOMC meeting: price stability, full employment, and a stable financial system.
Why is the Fed worried about inflation (or lack thereof)?
Price stability would anchor inflation expectations around the Fed’s targeted long-term rate of 2%. When inflation is maintained at reasonable levels, nominal yields for bonds (LQD) and required rates of return on equity investments (OEF) don’t experience sudden spikes due inflation shocks. Asset prices (ITB) also don’t rise faster than personal incomes, and real incomes don’t decline faster than real wage increases.
On the other hand, some regard a deflationary economic environment as even worse than an inflationary environment (remember Japan’s lost decade?). Inadequate consumption (XRT) or a lack of demand is one of the major causes of deflation. This is particularly relevant in the U.S. market, as consumption (RTH) comprises over two-thirds of the domestic economy. Inflation, measured by the percentage change in personal consumption expenditure, has averaged ~1% since January 2013. This is significantly lower than the long-term inflation target and therefore particularly worrisome to policymakers.
So there are two schools of thought, not just among the FOMC members but also within financial markets. One view says inflation is bound to surface over the long term due to expansion in the monetary base, while the other viewpoint indicates that inflation in the economy is still too low.
LQD is the iShares iBoxx $ Investment Grade Corporate Bond Fund. OEF is the iShares S&P 100 ETF, which tracks the S&P 100 Index. ITB is to the iShares U.S. Home Construction ETF, which invests in the U.S. residential construction sector. XRT and RTH are the State Street SPDR S&P Retail ETF and the Market Vectors Retail ETF, respectively, which invest in the consumer discretionary space.
The next article in this series deals with the second form of forward guidance: Delphic guidance. We’ll also discuss why Fisher says market practitioners prefer Odyssean to Delphic guidance.
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