The FOMC’s Saving Grace: Richard Fisher

In an economy where it is believed that every problem must only be solved through fiscal actions or monetary policy, Federal Reserve Bank of Dallas president, Richard Fisher offers at least some solace.

Richard Fisher opposed the FOMC’s decision last fall to initiate $600 billion in permanent open market operations, so-called QE2 and was also one of three dissenters opposing the Fed’s latest decision to forecast keeping interest rates at zero through mid-2013. He is a hawk, and is increasingly becoming the FOMC’s single saving grace. Without Richard Fisher’s analysis and insight, the Fed very well may be unchecked in its pursuit of seemingly indefinite easing.

In a speech given yesterday at the National Association for Business Economics annual meeting, Fisher outlined, among other things, the debate going on at the FOMC table. He stated that while there are differing opinions amongst the committee, and clearly there are those who are dovish, and those who are hawkish, each member does their “utmost to craft monetary policy so as to engender restoration of full employment in the context of price stability.”

Whether a dove like Chicago Fed president, Charles Evans, or a hawk like Fisher, all central bankers alike make this same claim. Few, however, stand by it. Fisher seems to be one of those few, advocating that further Fed easing runs the risk of high inflation and will result in little economic gain, and if any, will be short-lived.

From his speech:

“I feel the most important role for a central banker is to maintain price stability―and I am always on watch, hawk-like, on the inflationary front…

When people are frightened, they understandably look for a “fix.” Yet, my colleagues and I are professionally beholden to beware of short-term fixes that might contradict, or place in jeopardy, the long-term duty and credibility of the central bank. I am wary of adopting any policy that might have the unintended consequence of becoming a veterinary fix rather than a more salutary repairing of the ability to propagate jobs.”

Fisher goes on to say in his speech that the Fed has done a great deal to stem the damaging effects of the financial crisis and that further easing in response to mere short-term events in the market can produce moral hazard and misallocation of resources. Citing his discomfort with further Fed easing that was discussed at the previous meeting, and which will surely be discussed in September, he feared that the FOMC will be viewed as “trigger-happy” and will be signaling to the market that there is a readily available “Bernanke Put.” This is a worthy concern considering that during the era of the “Greenspan Put,” America experienced two bubbles in less than ten years, and is still recovering from them both.