This post was written by Simon van Norden of HEC-Montréal.
A few weeks ago I blogged about the views of Richard Fisher, President of the Federal Reserve Bank of Dallas and self-described "inflation hawk." Mr. Fisher is an important man; among other things he was a voting member of the FOMC in 2008 and will be again in 2011. He's also one of a number of regional Fed presidents (such as Charles Plosser or the long-serving Thomas Hoenig) that have repeatedly dissented from majority opinions over the past few years because they felt that their concerns about inflationary pressures were not adequately addressed.
Although most of my earlier blog post just quoted from his speeches, you couldn't describe it as a friendly or neutral post. I concluded it by saying
My bottom line is that I agree with Krugman. It is depressing, no, make that calamitous, to have someone with such a dangerous and cultivated degree of ignorance in a critical decision-making role. But let's not be surprised. And let's not pretend that Mr. Fisher is alone.
That kicked off a lively discussion, but the most surprising part of it (to me, anyhow) was the e-mail that I received a couple of days later.
Dear Mr. van Norden:
I am amused by your comments ...
I would be delighted to host you in coming to Dallas to meet with me and my team so that we can better understand your views and so that you might better understand ours....
I look forward to meeting with you and exchanging views.
With all best wishes,
Richard W. Fisher
There are some invitations that you just can't accept quickly enough! So I talked with Richard Fisher last Friday over breakfast for an hour and a half. I also had a chance to present some of my research and talk informally with members of his staff.
What can I say? Richard Fisher is experienced, engaging, open, approachable and a charming host. He is a bilingual, dyed-in-the-wool free trader, as am I. He talked a lot about his experiences, the important people he meets, and his ideas about economics and politics. He was also frank about the shortcoming in his economics training (a BA at Harvard; he was brutal in his assessment of the education that he received there and said that he was much more influenced by the economics that he learned during his MBA at Stanford.)
I came with five key questions in my head for him and his staff.
- Faced with conflicting expert opinion on inflation and growth, how does he justify his focus on inflation risks? or more generally, how should monetary policy be made in the face of such uncertainty?
- Given lots of experience with globalization and its effects on monetary and fiscal policy in countries like Canada and New Zealand and the UK, why does he think this is poorly understood or different in the case of the USA?
- How much is his thinking influenced by the experiences with financial and banking crises in other developed economies? By some of the research that has come out of the IMF or World Bank or BIS over the past decade?
- Knowing what he knows now about the events of 2008, does he regret his push for tighter monetary policy during a recession and just before a massive systemic banking crisis? Or, given the behaviour of oil and commodity prices at the time, would he do the same again?
- Is it possible for an outsider to judge whether or not a central banker is doing a good job? or to tell a competent one from an incompetent one?
The answers, or lack of them, did nothing to inspire my confidence in the decision making process of the Board of Governors of the Federal Reserve System. You can blame me for part of that; I didn't have the chutzpah to ask #4 or #5 directly of Mr. Fisher or his staff. He deflected #1 and #2, saying that he and his institution were very interested to hear views on them. The answer to #3 seemed to be "not much."
I also learned about Mr. Fisher's view of his role in overall decision-making in the Federal Reserve System. He emphasized his private-sector financial experience, his comparative advantage in understanding the views of the business community and talked about his efforts in conveying that information to the FOMC. For example, his latest speech notes
...the prevailing sentiment ... that politicians and officials who craft and enforce taxes and rules have been doing so in a capricious manner that makes long-term planning, including expanding payrolls, difficult, if not impossible.
On the plane home, I found that this role got me thinking about central bank independence. Mr. Fisher has argued that
In times of economic duress, there is always a temptation for political authorities to compromise the central bank. .... It is important that the Federal Reserve be left to do its job and no more.
I agree, and I think most other readers of this blog would as well. Pretty much everyone also agrees that, in the real world, economists should make a point of talking to business people. So where does the dividing line between these principles lie? To what extent should "talking" to the business community imply "listening"? Should business concerns drive monetary policy? I think most would agree that the right role for the Fed is to treat business the way it treats any other special interest group.
- It should explain Fed actions to them.
- It should listen to see if there are potentially important issues or facts that it may have missed.
- It should then "be left to do its job."
I worry that Fisher is going beyond that. Krugman writes that Fisher is
...arguing that it's not the Fed's job to help the struggling economy, because the big problem ... is business uncertainty about future regulation. Urk. Like others, I've tried to point out that there is no evidence for this claim: business investment is no lower than you'd expect given the state of the economy, while surveys say that weak sales, not fear of regulation, are holding back business expansion.
Having listened to Mr. Fisher, I find myself agreeing with Krugman; the claims that government-created uncertainty is mostly responsible for holding back economic growth just now seem to be literally incredible. If Fisher's role is just to report those views to the Board, great. But where's the critical analysis of those claims? Shouldn't that be a vital part of repeating them in speeches? To business audiences? And if he's urging the FOMC to pay more heed to those views, you'd want him to have the quantitative analysis to back them up. More to the point, you'd expect him to put the emphasis on that analysis rather than on the "businesspeople say so." The independence of monetary policy is incompatible with the assumption that one or another lobby group knows best.
Endnotes [You can take the boy out of academia, but you can't take academia out of the boy - ed]:
- Under the rules of the FOMC, only some FOMC members are allowed to vote. Regional Fed presidents vote for one year in three.
- I do not understand how someone can accept the responsibility to vote on the FOMC without a view on how such decisions should realistically be made. I also don't understand how to reconcile Mr. Fisher's speeches emphasizing his view that globalization has made monetary policy much less effective with the view standard in open-economy central banks that openness makes monetary policy more potent, or why he would make such claims in speech and then say that he's open to other points of view.
It is possible that he has very good answers to these questions of which I have not thought and which he simply chooses not to share with me at this time. I'm using the word possible here in its broadest sense (e.g. in the sense that it is also possible that Jay Baruchel is the reincarnation of Leon Trotsky.)
- We didn't talk about what the Fed could do about this. I have not heard Mr. Fisher argue that the Fed should do more to assure markets that interest rates will stay very low for an extended period, nor that it should set a growth rate target. I'm pretty sure that he thinks that these would be bad ideas.
- In the slides for his Nobel Prize lecture, Paul Krugman labelled this his #1 rule for research: "Listen to the Gentiles."