Dallas Fed’s Fisher: U.S at Risk of Overprescribing ‘Monetary Ritalin’

Fed president says ‘we have done our job, we have done enough’

“We provided the gas, the gas tank is full,” Richard Fisher said of the Fed’s role in fueling hiring. (Photo: AP) “We provided the gas, the gas tank is full,” Richard Fisher said of the Fed’s role in fueling hiring. (Photo: AP)

Richard Fisher, president of the Federal Reserve Bank of Dallas known for colorful analogies, spoke with Bloomberg Television on Wednesday, saying that “we’re at the risk of overburdening the central banks” and “we keep applying what I call monetary Ritalin to the system. We all know there’s a risk of overprescribing.”

Fisher also said that “we have done our job. We have done enough. Just doing more doesn’t solve the problem. The problem is engaging the transmission. We provided the gas, the gas tank is full.”

Fisher on how he feels about more quantitative easing:

“First of all, whether you are a hawk or a dove, whether you are the head of the Federal Reserve Bank of Boston or Dallas or one of the Federal Reserve governors, all of us are trying to figure out how to deliver on our mandate. We have a mandate from Congress to conduct monetary policy so as to keep price stability. All of us believe, including hawks like me, that the immediate threat to the system is not inflation …

“The other issue is: How do we fulfill the mandate to create the conditions to achieve full employment? That is where you have a difference of view and a discussion taking place. I should remind you it is a civil discussion, not like Congress where we beat each other to a pulp. We’re working very hard to get the right answer.

“I do have a different perspective. My perspective is fairly straightforward. We all understand the theory. The theory is that if you lower the cost of money or provide more money, you change the discount factors and it works its way into the stock market and there is a wealth effect … My point is that we have so much extra cash and reserves sitting on the sidelines, it is not being put to work right now.

The question is: What will incent people to use the copious amounts of money we put out there and step on the accelerator and move job creation forward when we have the fiscal policy uncertainty? I think we're pushing on a string. It is a great risk that I am not only worried about, but the Bank for International Settlements wrote their entire annual report and concluded we are at the risk of overburdening the central banks.”

On what should be the appropriate prescription for the short term:

“The prescription word is the appropriate word. We keep applying what I call monetary Ritalin to the system. We all know there is a risk of overprescribing. And we have to worry about the long-term consequences of what we do. We have an enormous buildup in reserves. It is not being utilized right now. We have $1.5 trillion in excess bank reserves. Those bankers would like to put that money to work. We have 2 or 3 trillion dollars sitting on the sidelines in corporate America.”

On how to stimulate moving that money for constructive use:

“Very easily. You provide the incentive for the private sector to put people to work. That can only be provided by tax policy, fiscal policy, regulatory policy. I believe we have done our job. We have done enough. Just doing more does not solve the problem. The problem is engaging the transmission. We provided the gas. The gas tank is full. Who will incent the driver of this economy to step on the accelerator and move it forward? That is the private sector.”

On what Dallas is doing differently that the rest of the nation can learn from:

“We have the same monetary policy as the other 49 states. Monetary policy is no different. Interest rates are the same here, same cost of borrowing, same mortgage rates, etc. What accounts for the difference? The answer is a different, at least at state level, fiscal policy, regulatory policy, more pro-business, more pro-job creation.

“We have outgrown New York by a factor of over 4-to-1 for 22 years. We’ve outgrown the United States by 2-1 in terms of job growth. So something is right down here, yet we have the same monetary policy that affects all of the other states. Question, what makes the difference? Answer, the way our fiscal and our regulatory system works at the state level. If we could only do something that encourages in the same way at the national level, I believe we would have a great national economic boom.”

On whether interest rates should be higher:

“I’m not saying rates should be higher. I do think corporate America is taking advantage of what we intended to do, which is you lower rates, certainly on governments. Recently in my hometown, Texas Instruments issues a 3- and a 7-year, the lowest rates in history of corporate issuance. The after-tax cost of the two was about 1.8%. They pay a 2.5% dividend. You can do the math. It’s pretty cheap way to borrow, pay out your dividend, buy in some shares. I did ask the company if they intended to hire more people. The answer was no.

“My colleagues would argue that that company is better positioned now to go out and hire. The question is, what will incent them to hire? The answer is it will have to come from the Congress and the fiscal policy authorities. We provide the fuel. Balance sheets are in better shape than they ever were before. Companies have driven down their costs…

“Corporations have a three-year or four-year budgeting cycle. Short-term fiscal fixes do not provide them with any confidence. They are totally uncertain about the course of their cost structure…so they are in the defensive crouch. They are rich now in a defensive crouch, whether they are public, private, big or small, and they are ready to go to work, but they need to be incentivized to do it. We cannot provide that incentive. All we can do is provide the fuel. That’s the difference in our arguments.”

On what the imminent threat is if the Fed issues more stimulus:

“The question is effectiveness. Secondly, we're at the risk of overburdening the central bank. Thirdly, we are at risk of being viewed as too politically pliant…I know for a fact, because I know Ben Bernanke so well. Such a good fellow and a thoroughly decent man, this is not what is influencing him. I am very worried we will be perceived as such if we decide to do more in September. The time to do more would have been in August. I disagree with that policy, but if you're going to do it, we should have done it. The closer we get to an election, the more I think the perception incorrectly will be that we have become too politically pliant. So there’s a lot of downside here and the question is, for what upside?”

On what the Federal Reserve should avoid right now:

“We should avoid creating an impression that we can solve all of the problems. We cannot. We’re a monetary authority. Monetary policy is necessary, but not sufficient…The other day our chairman sat in front of a Senate committee. One of the senators, my former classmate, Chuck Schumer from New York, a very good friend of mine, he said, ‘Mr. Chairman, you are the only game in town.’ We are not the only game in town. When we get people thinking about that, [it] leads to problems.”

On what would occur if the Fed stepped away:

“I know if we continue to try to solve their problems, they will not step in and do what they need to do. They need to get their house in order and provide incentives for the private sector of this country to grow and create jobs. That means rejiggering and rebooting tax policy, spending policy and regulatory policy. As long as we keep subsidizing, they will not get the job done. That is my view, and it is a personal view.”

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