Fed’s Fisher: “Uncertainty” Is the Underlying Problem in the Economy

Dallas Federal Reserve President Richard Fisher tells FBN that the FOMC meeting August 10th was not “contentious but rather an opportunity for “everyone to give their best input.” Fisher said we need to “stop this business of people becoming so large, taking large risks, that they put the system at risk.” He also adamantly expresses that any action taken by the Federal Reserve or Congress should “not penalize private business” and should ultimately serve to restore consumer confidence.

Here are the key highlights from the interview, courtesy of Fox Business Network:

On the tone inside the Federal Reserve’s Open Market Committee meeting August 10th: “I would not use the word contentious. We do not have contentious meetings. This is a collegial group. The beauty of the Federal Open Market is we are encouraged to lay our views on the table. We are very straight forward and everyone gives their best input and it is a decided as a committee what the course of action will be. We do not have knock down drag out fights. There are differences of views and that’s why we get together as a group.”

On “too big to fail”: “I do believe we still have a problem with too big to fail. One of our duties now is to implement the Dodd-Frank regulations. We have to regulate better and make sure all those institutions under our regulatory purview are fairly regulated and does not disadvantage small banks in favor of larger institution and make clear if they screw up they will fail. And I don’t think that message has been clearly transmitted yet.”

On whether Volcker was right predicting a bubble with the removal of the Glass Steagal Act:
“Yes. I have a great admiration for Paul Volcker. The system has become much more complex than it ever was before. We have to find a way to take that Volcker argument, modernize, and how do we stop this business of people becoming so large, taking large risks, that they put the system at risk.”

On how he would advise Congress to handle the tax cuts:
“Congress has control of the purse strings so I am hesitant to give advice there. Whatever they do should not be constructed so that it undermines confidence of the people that create jobs and that’s businesses. The only message I would give to Congress is to make sure they don’t do anything that further undermines confidence at a very fragile time. We have to make sure we do not penalize the people who are the job creators of America which is private business. That’s what makes this country work. We have to get back on that path.”

On why we are continuing to spend to keep rates low that aren’t encouraging spending:
“We took some very dramatic action in the face of an urgent situation. We were very successful in those programs. The real question is what more can the monetary authority do? Can we do more? Should we do more? Or are the problems residing elsewhere. There’s a lot of liquidity that’s been built up. I would argue we have been very successful from going to a financial crisis to a situation where corporations are hoarding cash. Even small business surveys show the price of money and the amount of liquidity available is not a problem for those who wish to borrow. We have succeeded in our mission, the question is the transition mechanism to get that money into the economy so we create jobs.”

On whether the Fed should continue inflating the balance sheet:
“My view is shaped by what I hear in the microeconomic community. What I am picking up from the street is not the cost of capital nor the availability of liquidity, it is all the uncertainty. A lot are withdrawing to get greater clarity. That is an inhibiting factor. Would we be pushing on a string to provide further accommodation or would we actually be helpful in stimulation the economy. I think that’s an open debate.”

On keeping interest rates low:
“The Fed has been quite clear we are going to keep rates low for an extended period. We did expand our balance sheet above $2 trillion dollars. There is a lot of uncertainty in terms of fiscal authority and greater clarity there would help. Again move the transmission mechanisms so that a lot of the liquidity that has been built up can be put to work, in employing American workers, at a time when inflation is not the immediate threat. The real issue is would further accommodation by  the Fed enhance the transmission mechanism or is the mechanism itself holding back how efficient our monetary tools can be. We deserve some credit and Chairman Bernanke deserves an enormous amount of credit for leading us back from the edge. Now the question is what happens next.”

On the risk of deflation:
“There is always a risk of deflation. Right now we are in the 1% plus range and I am not uncomfortable with that. We do have a duty to make sure we don’t slip to the deflationary side. Presently the real issue is how effective can we be at creating jobs without stirring the embers of inflation long term.”

On accusations that the Fed is reactive:
“We are trying not to react. None of us are trained that way. We try to anticipate what’s coming down the path and sometimes that involves making unpopular decisions.”

On the Fed acting as a lender of last resort:
“All central banks are designed to be the lenders of last resort. The real issue here is expanding our balance sheet now that rates have been cut to near zero. We dealt with some extreme measures but all within the playbook as a lender of the last resort.”

On whether ending the purchase of mortgage back securities caused the economic slowdown:
“No. You have to realize the way the mortgage back securities profile works. As rates come down, the redemptions on those rates became greater.  The report was showing we were going to have a greater roll off from our balance sheet than we had anticipated. The issue was whether we should replace those roll offs, and if so how should we do we do it. The amount of treasuries on the balance sheet right now are back to a pre-crisis level. We didn’t want to send a signal that we were tightening, at a time when the data was getting a little bit weaker, and the decision was taken to reinvest what was rolling off into treasuries so the size of the balance sheet stays the same. The data has weakened somewhat.”

On the economic outlook:
“The economy is not as robust as we would like it to be. Certainly we will won’t be operating at our full potential for quite some time. And yet as we look out to 2011 and beyond we expect the economy to pick up while we have this soft patch taking place this year.”

Had they not done anything, whether it would have been perceived as passive tightening:
“I think that’s what the committees collective judgment was.”

On worries that low rates will inflate a new asset bubble:
“It’s signaling how we view the future. We are fortunate to have superb minds and copious amounts of data. It’s important not to misinterpret what we are saying which is that we do not have a robust recovery, we have very hesitant consumers because unemployment is high, we have already cut rates very low, we did what we were called to do as central bankers to restore liquidity to the market, and now the question is what to do going forward.”

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