Dallas Federal Reserve Bank President Richard Fisher said Friday the central bank’s continued tapering of large scale asset purchases will not restrict the liquidity needed for economic growth.
“For the economy as a whole, there is abundant liquidity to finance economic expansion, and the FOMC will assure that it remains affordable as long as the prospect of inflation rising above its 2% target remains in abeyance,” Fisher said in a speech prepared for delivery to the Louisiana Bankers Association in New Orleans.
Fisher, repeating a position he made clear in an exclusive interview this week, said he will vote for reducing the large scale asset purchases by $10 billion at each of the next three policy meetings, and for “eliminating them entirely at the October meeting with a final reduction of $15 billion.”
Fisher, who votes on the Federal Open Market Committee this year, will cast such votes “barring some destabilizing development in the real economy that comes out of left field,” he said.
And that pace is fast enough for Fisher, who did not support the program when it went into effect in 2012. The reason, he said, “is an admission of reality: We juiced the trading and risk markets so extensively that they became somewhat addicted to our accommodation of their needs,” referring to the “taper tantrum” of spring 2013, when long-term Treasury yields dropped from 1.6% to around 2.7% in just two months.
“I have accepted that the prudent course of action and the best way to prevent the onset of market seizures and delirium tremens is to gradually reduce and eventually eliminate the flow of excess liquidity we have been supplying,” he said. “The financial markets now seem to be unperturbed by and appear to be fully discounting the reduction pattern I am supporting.”
He added: “One would be hard pressed to say that ending our asset purchases, which the depository institutions from whom we buy them deposit back with us as excess reserves, would deny the economy needed liquidity.”
As QE3 comes to an end, Fisher said, the normalization of monetary policy will raise questions “about whether we should focus on the federal funds rate, which has been our traditional fulcrum, or some other measure, such as the rate we pay on excess reserves or that we pay on overnight reverse repos or some mix thereof. You can expect to hear more about this as time passes.”
In his interview, Fisher said the FOMC needs to be in charge of the tightening process when it begins, and not the Board of Governors which has charge of the Interest on Excess Reserves.
Fisher also said in his speech that the Fed’s communication policy will continue to evolve over time, adding that “expressing the FOMC participants’ perceptions of, and possible reactions to, an assortment of future scenarios … does strike me as having some merit, if only to give markets insight into how the central bank might react under different circumstances.”
This echoes similar calls by Philadelphia Fed President Charles Plosser, who in a speech Thursday said the Fed needs to more clearly define and communicate its reaction function using a systematic rule-based approach.
Again bemoaning the markets’ focus on the dot graph used to represent each FOMC member’s forecast for the start of policy tightening, Fisher warned that they are just guesses.
“Truth be told, however we dress up our forecasts as rigorous analysis, they are no more than the very best educated guesses of the superbly trained but still human staffs,” he said.
There have been suggestions from outside and within the Fed “on how to better present our ‘best guesses’ as to when we will move the base rate for anchoring the yield curve,” he said.
One example is identifying which dots belong to current voting members of the FOMC, he said. Another suggestion: Only report the median of responses or the median of voter responses, rather than the entire array of dots.
“But neither of these approaches would do anything to enlighten the markets as to the views of future voters, nor would they overcome the underlying problem with date-based forward guidance,” Fisher said.
He cautioned against becoming overly preoccupied with the FOMC’s SEP. “In my less than humble opinion, it is a flawed tool,” he said.
Fisher, who was speaking to a banking audience, said “Louisiana’s and the nation’s community and regional banks play on an uneven playing field against the giant money-center banks.”
He said he is “skeptical” that Dodd-Frank reform and “the bureaucracy and rules and regulations this massive legislative initiative has created, even with the careful execution by the Fed, will vanquish too big to fail – the law’s very intention as stated in its preamble.”
Fisher also said banking applications to join the Federal Reserve System in the Dallas Fed district increased by 8% in 2012, by 19% in 2013, and “we have already increased membership an annualized 26% in the first three months of 2014.”