Interview with Dallas Fed President Fisher: Fix the Credit System First

Fisher: Fix the Credit System First

If the Federal Reserve cuts interest rates again next week, Richard Fisher again may be standing apart from his colleagues.

Fisher

The president of the Federal Reserve Bank of Dallas has broken with other voters on the Federal Open Market Committee during the central bank’s last two policy meetings when the Fed made aggressive rate cuts. In a recent speech, he expressed “strong reluctance” to cutting rates further — from the current 2.25% — given the potential to stoke inflation.

In an interview Monday, Mr. Fisher said slower growth may not address inflation concerns because the world economy — a key driver for surging commodity prices — is only facing a mild slowdown. “We’ve been weakening and we haven’t seen the price responses,” he said.

Mr. Fisher said the U.S. may face a “long period” of “anemic growth” as credit and housing pressures weigh on the economy. Lower interest rates may not help businesses create jobs until the credit system is repaired, he said. –Sudeep Reddy

Excerpts of the interview:

You’ve said you have a “strong reluctance” to further easing. Why?

You have to put into perspective the way I behaved on fed funds in the context of how the system works or does not work. When we got to 3.5% [at January’s unscheduled policy meeting] and were starting to go below that, my personal bias was to make sure we got all of the plumbing working. The question really is about the efficacy of the system. Will consumers and small businesses benefit from these rate cuts?

… The thing that I admire about Ben [Bernanke] is that right away – without a nanosecond’s time — he was thinking through these issues that I think should’ve been thought through before. But they weren’t; there were other priorities. The question is: what is the efficacy of further rate cuts? Do they have their impact? … We know that there is a time lag — six months to 18 months. I do think we’re going to have a longer workout period to get the system back in order. And we’ll have slower economic growth than we would have otherwise had. But the secondary consideration for me is, having eased, the pipes start working. They get unclogged, and the system starts actually getting to what I call the lawn of noninflationary sustainable growth. And then we might start from a higher inflation level.

So that concerns me as well. But it’s really a question of, are we getting the bang for the buck. And clearly we’re not. The system was sputtering. And I began to feel that at 3.5%. After that, that’s when I dissented. Obviously for this next go-around, I have to watch to see if there is any change in signals. I’m just starting my briefings now for this. I haven’t heard anything. We do have obviously the kind of weak economic growth that I think the committee as a whole has been expecting. I’ve been a little more bearish than some of my colleagues on economic growth. But we may eke out.

What I’m hearing from CEOs is … the first quarter may have been positive, second quarter’s probably not. Real concerns about small businesses. Why? Because they’re not getting access to credit… The credit system strikes me as being at the heart of the problem. And obviously the Fed has worked very hard on this. I’ve been in favor of every one of these [liquidity] initiatives. To me that’s where the priority is. To get the other to work the way we’re used to it working, it just strikes me that that has to get back to its efficient transmission mechanism.

Most FOMC members believe slower growth will address the inflation problem. Why don’t you?

It’s a question, first of all, of whose slower growth. If it’s just U.S. slower growth, I don’t believe that’s the answer because a lot of labor and tasks are priced globally. One of the arguments is there’s worker insecurity, in a globally competitive marketplace; therefore labor will be more restrained.

Will the U.S. slowing down really damp the price of oil, or the price of food, rice, or flour, cornmeal, the price of steel? … It’s not clear to me that a mild slowdown will put a dent in price pressures domestically. Obviously if you have a tail risk of a very severe global slowdown, then yes, I can see that. I don’t see that in the cards at least from my limited perspective. If you think in closed-economy terms, that’s more likely to obtain. If you think in global terms, it is less likely to obtain unless the whole world slows down.

The last five FOMC meetings have had dissenting votes. Do you think dissents build up to sway other members of the committee?

I don’t know. You’re injecting your view into a roomful of views and depending on how you argue your viewpoint, and whether it has merit or not, and I think that’s very important. And so if it has merit, yes other people may listen. … The job of the 17 participants on the FOMC is to give an honest view. I honestly believe every one of my colleagues does that. Now, they might do it more forcefully in a certain area because they want to draw the attention of the committee to that area. A “negative feedback loop” – I won’t mention the name of the individual – on the economy or in my case inflationary pressures that are building. So you might emphasize saying more than the rest.

I think every single person on the committee basically is pursuing the truth. It’s the only place in government you can do it. People don’t dislike you for it. When [Richmond Fed President] Jeff Lacker was dissenting last year, we’d sit down at lunch afterward and pat him on the back – “Good try, pal” or “I hadn’t thought about that” or “That’s an interesting viewpoint.” … There’s no enmity. And it’s an honest intellectual debate. I don’t think anybody’s trying to sway anybody else. I think they’re trying to just get what they feel out on the table. And it’s up to the group to decide if it’s valid or not.

…I think the market should look at what the group decides. Even if you have dissents. It’s what was decided as a group and what signals are being sent.