Fed's Fisher lambasts QE2

Richard Fisher, the president of the Dallas Federal Reserve, on Monday attacked the Federal Open Market Committee's (FOMC) decision to buy an additional $600 billion-worth of Treasury bonds by next June, saying the purchases will do little to create jobs and much to spur financial speculation at the expense of poor Americans.

"There are some green shoots beginning to emerge in a landscape still pocked-marked by brown spots. General economic conditions are improving slightly and are expected to continue doing so," Fisher told an audience in San Antonio, Texas. "The risk of a double dip in economic activity has lessened, as has the risk of deflation. Financial speculation and excess, however, is beginning to raise its hoary head."

Fisher described a climate in which nonfinancial and financial companies alike were "flush with liquidity." He said: "Bankers are aggressively courting the larger corporate credits; several of my CEO and CFO interlocutors report that in the last few weeks, the biggest banks have approached them 'literally begging to lend us ten-year money at less than 3%." Despite this environment, however, companies were reluctant to invest in the American worker, struggling with unemployment at 9.6%. "Most all the businesses I talk to are expanding investment in productivity enhancement. Far too few of the large companies I talk to report interest in hiring American workers or committing to large-scale capital expenditures in the United States; they believe their potential for return on investment is greater elsewhere," he said. "The smaller companies that do not have global options are putting off hiring until the coast is clear on the tax and regulatory fronts."

In such a climate, the FOMC might then be prescribing the wrong medicine. "Liquidity and abundant money are not the binding constraints on the economic activity we wish to see," Fisher, who becomes a voting member of the committee in 2011, said. "The binding constraints are uncertainty about income and future aggregate demand, the disincentives fiscal and regulatory policy impose on ridding decisionmakers of that uncertainty, and the reluctance, given those disincentives, of those who have the power to create jobs for our people to invest in undertakings that would create them."

The remedy was, then, in the hands of the fiscal and regulatory authorities, not the Fed. "I could not state with conviction that purchasing another several hundred billion dollars of Treasuries-on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities-would lead to job creation and final-demand-spurring behaviour," he said. "But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed."

No Congress would, he said, support a monetary policy that created the conditions for such a spectacular transfer of wealth. "We are already seeing the beginnings of speculative activity in stocks, bonds, buyouts and commodity markets. The rich and the quick are certainly able to exploit these circumstances to get richer," he said. "Senior citizens and others who saved and played by the rules are earning nothing on their savings, while big debtors and too-big-to-fail oligopoly banks benefit from their subsidy."

This transfer of wealth could in turn be worsened if the Fed's second round of quantiative easing served to depreciate the dollar. "Much of what we export is in the form of high-value-added goods and services and in commodities like cotton and soybeans that we produce with enormous efficiency," Fisher said. "A not insignificant portion of what we import, in addition to oil that feeds into gasoline prices, is used to clothe and support lower-income earners, the very people suffering from unemployment or job insecurity whom we are endeavoring to help."

He added: "When faced with a further squeeze on their margins that comes with higher import prices, the Wal-Marts, Dollar Generals, Costcos and other stores where the most impacted people buy necessities will likely react by driving productivity even harder, which, translated, means selling more while employing fewer workers."

FOMC split
Fisher's comments highlight the likelihood of a deep divide among voting members of the FOMC next year.

All of the Federal Reserve Board governors, of which there should be seven but at present number six, and regional Fed presidents participate in the committee meetings. However, only the governors and the president of the New York Fed always have the right to vote. The president of one of the regional Feds votes two years out of three, with the other regional Fed presidents voting for one year out of every three.

In 2011, the regional Fed presidents with votes are: Fisher; Charles Plosser, the president of the Philadelphia Fed; Charles Evans, the president of the Chicago Fed; and Narayana Kocherlakota, the president of the Minneapolis Fed.

Ben Bernanke, the chairman of the Board of governors, and Bill Dudley, the president of the New York Fed, have led the campaign for more quantitative easing. Voting members tend to vote with the chairman unless they have serious objections to the policy proposed. Though Evans has indicated that he shares Bernanke's views on quantitative easing, Plosser and Fisher have been among the most vociferous critics of many of the committee's more radical actions. Kocherlakota said in September that more purchases of Treasuries would do little to spur growth.