Breakfast at Richard's

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^[1].  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.

1. 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?
2. 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?
3. 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?
4. 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?
5. 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^[2].   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.^[3]

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.^[4]   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]:

1. Under the rules of the FOMC, only some FOMC members are allowed to vote. Regional Fed presidents vote for one year in three.
2. 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.)
3. 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.
4. In the slides for his Nobel Prize lecture, Paul Krugman labelled this his #1 rule for research: "Listen to the Gentiles."

Comments

[Determinant]

From my observations of people who experienced the inflationary 1970's, they don't ever, ever want to go back to those times. It spawned a whole new generation of inflation hawks. The fact that we've come full-circle rate-wise down to the zero-rate lower bound is lost on them. I would say Richard Fisher is one of those people. The trouble is it's not the 1970's any more.

Perhaps there is a natural human view that those with money want to keep it. Inflation affects those who have money, the employed. Deficient Demand affects those without money, the unemployed.

Government-created uncertainty? Pray tell what does he mean? The health-care act which will impose individual mandates? I will say flat out that both businesses and consumers will love the act when it's in full force and takes a good deal of risk which impedes greater consumption out of the system.

Banking reform? That is more narrow and given the bailouts that occurred, a good portion of the American public is crying for "Never Again" and a pound of flesh and all the usual populist cries.

Maybe a more telling question is to ask Mr. Fisher if markets can fail. If so, do the Fed and the US Government have to step in to sort things out. That really seems to be the philosophical issue here.

[Andy Harless]

I think it's (almost) irrelevant to what extent weakness in business spending can be explained by regulatory uncertainty. The Fed's mandate is not conditional on optimal government policy. If the government were running large deficits during a time of full employment, it would naturally be the duty of the Fed to offset the inflationary impact with tight money. If, during a time of low employment and below-target inflation, the government is following policies whose impact is to exacerbate that situation, it is the duty of the Fed to offset that impact with easy money. If it were strictly a supply-side problem, that would be different, but clearly it's not, or the inflation rate would be rising instead of falling.

[Just visiting from Macleans]

Did their factory farmed eggs taste any worse than our Egg Marketing Board controlled eggs? jk

[Richard H. Serlin]

"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, like all of the other federal Reserve bank presidents, must be confirmed by majority vote on the Federal Reserve Board of Governors in 2011.

One thing I never got a good detailed explanation for is why -- if Bernanke really did what much greater stimulus -- he didn't threaten to not confirm the obstructing bank presidents, and follow through if necessary. He has a majority for stimulus right now on the Board if he wants it to vote with him on this, and if he pushed Obama for recess appointments he might get even two more votes soon.

Why wouldn't he do this if he really wanted stimulus? Is "consensus" really that important compared to the great costs of the long delay we've already had in helping the economy and millions of unemployed families?

[Lord]

Uncertainty is what the Fed creates when it fails to support the economy as it is doing now.

[Nick Rowe]

What Lord said. Precisely. We do not know what the Fed is even trying to do. At least we know what the Bank of Canada is trying to do, because it keeps on repeating the 2% mantra. The only uncertainty is whether the BoC will get it right, and what it will need to do to get it right. With the Fed, nothing is certain.

[Jim Rootham]

@Just visiting

I'm not sure if they taste better, but the factory farmed eggs are more likely to make you sick.

[Jim Rootham]

Apologies to the rest of you for the return fire at the drive by.

[Frances Woolley]

Determinant: "From my observations of people who experienced the inflationary 1970's, they don't ever, ever want to go back to those times. It spawned a whole new generation of inflation hawks." I wonder about that. As someone who grew up in the 70s, I just regard inflation as normal, and am always vaguely surprised when prices don't change from year to year. When nominal prices decline over time, as is the case for goods whose production costs have been slashed by outsourcing, it strikes me as very strange. T-shirts, in particular - think of everything that goes into making a t-shirt from growing the cotton to spinning it to knitting it into fabric to designing the t-shirt, cutting the fabric, sewing it up and shipping it, how can a t-shirt possibly be so cheap?

[Determinant]

I have seen any number of people who lived through those times who regard double digit inflation and nominal interest rates with unveiled contempt.

[Phil Koop]

Many thanks for posting this - it's fascinating, if sobering stuff. But are you seriously saying that of five prepared questions, two were not asked, two not answered, and the only material response was that a regional Fed president sees no reason to examine financial crises in other developed economies when formulating policy for America?

Good grief. For once: what Nick said.

[Frances Woolley]

Determinant - but did those people who regard inflation with unveiled contempt grow up in inflationary times or in times with relatively stable price levels? The economic times you grow up in affect your attitudes for life.

[Just visiting from Macleans]

Apologies to the rest of you for the return fire at the drive by.

Actually, it was a bit more subtle than that. If I understand Richard Fisher's argument properly (and there's a good chance I don't) he suggests more certainty in regulation leads to better business outcomes. So, what could be more regulated/less uncertainty for business than an Egg Marketing Board? It was tongue in cheek.

But, since Simon indicated in his earlier blog that the skipper likes to use naval references in his speeches, I'll offer up this one for future use: "If Captain Bligh had not such an inflated ego, and had kept his crew's expectations low, he could have kept his Bounty".

[Simon van Norden]

"I have seen any number of people who lived through those times who regard double digit inflation and nominal interest rates with unveiled contempt."

Personally, I'm with Frances on this one. I also know senior who lived through the inflation of the 60s and 70s who view with unveiled contempt (okay....more like resignation) the low interest rates they're getting on their retirement savings.

[Simon van Norden]

Phil Koop:
"But are you seriously saying that ... a regional Fed president sees no reason to examine financial crises in other developed economies when formulating policy for America?"

No, I'm saying that he and his staff do not seem to have examined it yet.

Let's face it,
1) Not many (American? North American?) macroeconomists or monetary policy types pay attention to this literature,
2) This fact doesn't make the Dallas Fed look better; it makes most everything else look worse.

[Simon van Norden]

JVFM: Your understanding of his argument sounds right to me.

[Phil Koop]

"No, I'm saying that he and his staff do not seem to have examined it yet."

So that's all right then. What's the rush?

[Gregory Sokoloff]

I'm with Frances on this one: I grew up in the 70s, and inflation seems normal to me, although something potentially dangerous and worth keeping an eye on. So normal that only recently did I start wondering how one could manage to retire in a very low interest environment with low-risk financial assets providing such a minuscule income. If you don't lose your job in this recession you still might get hit trying to retire later. Our society, and especially the US, is just not designed to handle long and deep recessions, let alone a decade of deflation.