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We Are Sailing Deeper Into Uncharted Waters

We Are Sailing Deeper Into Uncharted Waters

By Richard Fisher - September 22, 2012

Remarks before the Harvard Club of New York City
New York, N.Y. · September 19, 2012 

It will come as no surprise to those who know me that I did not argue in favor of additional monetary accommodation during our meetings last week. I have repeatedly made it clear, in internal FOMC deliberations and in public speeches, that I believe that with each program we undertake to venture further in that direction, we are sailing deeper into uncharted waters. We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course. The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank—not, at least, the Federal Reserve—has ever been on this cruise before.

This much we do know: Our engine room is already flush with $1.6 trillion in excess private bank reserves owned by the banking sector and held by the 12 Federal Reserve Banks. Trillions more are sitting on the sidelines in corporate coffers. On top of all that, a significant amount of underemployed cash—or fuel for investment—is burning a hole in the pockets of money market funds and other nondepository financial operators. This begs the question: Why would the Fed provision to shovel billions in additional liquidity into the economy’s boiler when so much is presently lying fallow?

Great battles at sea are fought with modern analytical tools and the most sophisticated IT and advanced weaponry available. Fleet commanders, like central bankers, use every bit of the intelligence, technology and theory at their command. But ultimately, just as with great engagements at sea, the decisive factor is judgment. In forming their judgments, fleet commanders rely upon briefings from their senior officer corps on the elements, on the conditions at hand and on their tactical and strategic recommendations before deciding on the proper course of action.

As you all know, the Federal Reserve’s mission is mandated by the Congress. It calls for us to steer a monetary course according to a dual mandate—we are charged with maintaining price stability while conducting policy so as to best assist in achieving full employment. Most all of the FOMC members—the senior officer corps of the Federal Reserve fleet—have surveyed the horizon from their different watch stations and agree that inflation is not an immediately foreseeable threat. Over the past week, however, there has been a noticeable increase in the longer-term inflation expectations inferred from bond yields. These inferences can be volatile and are not always reliable, but a sustained increase would suggest incipient doubts about our commitment to the Bernanke Doctrine of sailing on a course consistent with 2 percent long-term inflation. I believe that even the slightest deviation from this course could induce some debilitating mal de mer in the markets.

Charting a Course to Full Employment with Businesses at ‘Sixes and Sevens’

In the current tumultuous economic sea, facing strong headwinds common in the aftermath of financial crises and balance-sheet recessions, our desired port is increased employment. Certain theories and various hypothetical studies and models tell us that flooding the markets with copious amounts of cheap, plentiful liquidity will lift final demand, both through the “wealth effect” channel and by directly stimulating businesses to expand and hire. And yet from the perspective of my watch station—as I have reported time and again—the very people we wish to stoke consumption and final demand by creating jobs and expanding business fixed investment are not responding to our policy initiatives as well as theory might suggest.

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Richard Fisher is the President and CEO of the Federal Reserve Bank of Dallas.

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