Dallas Fed Chief Speaks - Extended Interview
Tuesday, February 26, 2008Susie Gharib: There's a lot of data that's been coming out about the economy. As you look at all the data that's coming out, are you more or less concerned about inflation risks to the economy?
Richard Fisher: Susie, I'm concerned that as you read through any major newspaper in the United States.. it could be the Wall Street Journal, or any one of the regional papers, or the big money center papers or the Financial Times... there are more and more articles talking about inflationary perceptions and pressures. It's no question that in a globalized economy, whereas before we were the beneficiary of tailwinds that helped us with new labor supply feeding into our productivity here in the United States, now we're facing headwinds based on demand-pull inflationary forces with these 3 billion plus new consumers around the world. So I'm more concerned about inflation than I have been of late. It's a growing concern. We see it in particularly in commodities, and energy products. Those are usually taken out in core inflation measurements. However in Dallas, at the Dallas Fed, we don't use a core measurement. We use a trimmed mean measurement and even on that basis we see inflationary levels rising. The question is will it feed into expectations of consumers and business women and men here in the United States? And I do have a concern that it's beginning to feed into expectations and that's something we worry about at the Federal Reserve.
SG: Mr. Fisher, certainly we have seen some troubling reports about inflation recently, including today's PPI news. Do you think that the Fed is taking a chance by continuing to worry about economic growth?
Fisher: Well, look we have a dual mandate. Our job is to create the monetary conditions for sustainable non-inflationary employment growth. So to grow that aspect, and there's the inflation aspect. We're all very mindful whether we speak as individuals or when act as a group about our duties on the inflation front, as well as on the growth front. And I think you can safely assume that we're keeping both in mind as we develop and conduct monetary policy.
SG: As you look at the shape of the economy today, do things look any different than they did 4 weeks ago when you voted against an interest rate cut?
Fisher: The economy is clearly anemic. We're going to have a period of substandard growth that'll stretch for a couple of quarters, if not a little bit longer. At the same time, we do have worse numbers than we had before on the inflationary front. It's always dangerous in this business to do what I think is an oxymoronic thing which is instant analysis. You have to really study the entrails of all the new numbers that have come through. I think it's too soon to form a judgment as to whether the economy is indeed weaker than I expected or inflation pressures are worse than I expected. But clearly the numbers that have come through indicate that we're in for a period of prolonged, slow, economic growth. As you know. we expect growth to raise up in the second half of this year and as we end the year. But at the same time, I am concerned about inflation. I've expressed it as such. I'm not unique on the Open Market Committee. All of us are mindful of our need to not plant some seeds for future inflation as lag-monetary policy takes grip on the economy after 6 months or so, however long the lag may be. So, some things have changed, but I think it's very important that you have a Federal Reserve that takes its time to form its judgments, to analyze the data, to sort through the entrails of what we're seeing and to come up with an informed, considered action and statement when we meet. And we're in the process, of course, of digesting all the new data that's come through.
SG: What would you have to see happen in the economy that you would support another interest rate cut?
Fisher: Well, I don't want to get into where I'm leaning for the next meeting, but I would very much like to see a subsiding in inflationary pressures as they are coming to us through the globalized channels of the modern, new economy that we have. It's not enough in my opinion, to assume that if we slow down domestically here that that will give us the relief that we would like to have, or I would like to have, on the inflationary front. Again, we have what economists would call an income elasticity of demand in China, which leads to faster energy consumption than even their growth rate, very high rates of consumption for food as they move up the income ladder. They want to eat and dress and look and drive cars just like you and I do. And as they improve their capacity and their wealth, they're going to be consuming more. The same is true in India, or in smaller countries like Vietnam or even tiny countries like Estonia. All these new liberated people are now enjoying some form of capitalism. They're demanding more. There's a limited supply of certain things in the world until we increase that supply and have a supply reaction. And so we have sustainable economic pressures on prices that are no longer cyclical but rather are fundamental and I'd like to see some relief on that front in order to feel more comfortable with where to go next with monetary policy. At the same time, we have to balance out the concerns about how weak economic growth impulses might be. And again, right now, the mainstream analysis with the Dallas Federal Reserve and elsewhere is that we'll have periods of anemic economic growth, but then pick up towards year end. If I were to see a dramatic shift in terms of the tail risk on that front, that is, substantially weaker economic growth, then I would have to take that into consideration like all the rest of the members of the Open Market Committee.
SG: As a Fed bank president with a district that's right in the oil patch, does $100 oil make you more concerned about its impact on inflation or its impact on squeezing consumers and economic growth?
Fisher: It's both. First of all, it's driven by enhanced demand elsewhere in the world. We have 3 billion new people that are consuming things that just weren't here 20 years ago. That is, when I say here.. in the world at large. By the way, Texas is a beneficiary of that. There's no question. There are huge infrastructure developments taking place in the Gulf Coast. Our housing prices are actually rising not declining. We are enjoying a prosperity. We've created 31% of all the private sector jobs in America in the United States last year, were created in this one state. So we are the beneficiary. But I want to remind your viewers that we have five times the number of medical workers as we do oil and gas workers in Texas and that oil and gas sector is only 2% of our economy here. So we're benefiting from the global growth. We're the largest exporting state now, just pulled ahead of California. And we're booming due to globalization. That's a plus. At the same time, our people drive cars and have to consume food and are experiencing inflationary pressures, and so it's a balance between the two. It does crimp the ability of the consumer to live an enhanced lifestyle when you have these kind of price pressures. At the same time the profits and the royalty streams are increasing and it expands the ability of firms to employ people. So there are pluses and negatives on both sides, Susie.
SG: But what I'm getting at is when you're thinking in terms of monetary policy, how do you balance the impact of high oil prices because, as you just said, it cuts both ways?
Fisher: That's right. Well again, one has to consider whether these are temporary forces or longer term forces. I believe there're longer term tectonic, structural forces at play. If they were temporary I'd be less concerned about them. I'm more concerned because I think they have to do with demand-pull as I mentioned earlier coming from the world at large as it grows and the ability of supply to respond. I'm concerned also by the way that the futures markets for oils have not proven to be very good indicators of future oil prices. So if we have these sustained high price levels... if gasoline at the tank goes as it has up 8 cents two weeks ago, 9 cents this past week and keeps rising, no doubt it will feed into inflationary expectations of consumers, and then business women and men who run businesses, and that's what we have to guard against.
SG: From everything we're hearing from Wall Street to Washington, the message is that the US economy is going to slide into a recession. Do you think recession is serious possibility?
Fisher: I've said this before. I don't like the buzz word recession. That's a mathematical formulation of 2 consecutive quarters of negative growth. The real issue, Susie, is will we have a period of a prolonged economic slowdown and a decline in living standards. I believe that's a so-called tail risk presently. I don't think it is likely. It's always a possibility. We have to guard against it. We have to be risk conscious in terms of what the different tail risks are out there in the system. But I don't think that's a mainstream analysis right now. I expect fully that we will be picking up economic steam as we approach the second half and towards the end of the year and that's where we are presently. But we'll keep examining that assumption.
SG: Well let me throw another word at you that's been coming up in a lot of discussions about the economy, stagflation. I'm not talking about the stagflation of the 1970's, but do you see a return to some form of stagnant economic growth and high inflation. Is that a possibility?
Fisher: Everything is a possibility. However, again, the question is how long we have a weak and anemic growth scenario and then how sustained these inflationary pressures might be. I do think there.. I personally think there is a risk because of these globalized forces that we now have and the headwinds we're receiving from increased demand elsewhere and the needs of people to feed themselves, clothe themselves, drive up their BTU needs... that we could be in for a period of prolonged inflationary pressure. Our job is not to accommodate that at the Federal Reserve.
SG: Alright so, what are you saying about stagflation? I mean is this something we should start worrying about?
Fisher: We like these buzz words recession and stagflation. I don't think that's the issue. The issue is how can we conduct monetary policy and use the tool kits that we have in order to provide the conditions for sustainable, non-inflationary growth. That's what our hearts are set on. That's what our minds are devoted to. That's what we're trying to achieve.
SG: If the economy does pick up in the second half of the year as you and many other people are expecting, will we see a shift in monetary policy?
Fisher: Well again, it depends on the conditions that we're presented with. I do believe in the recuperative power of American style capitalism. The women and men that run our businesses are amazingly adept at adjusting to new circumstances. So I think every business woman and man I know is examining how they should run their business under this sort of anemic scenario that I described earlier, trying to figure out a way to enhance their bottom line and through expanding their top line, controlling their costs of goods sold and working their margins as aggressively as possible on behalf of their shareholders. These are the people that create jobs in America. And I suspect that after a while under any economic scenario they're going to figure out a way to do the job even better. But the one thing we don't want them to beg in inculcating is that there are certain price scenarios that they can push costs on to the consumer and thereby build in inflationary momentum. But go ahead I'm sorry, I interrupted you.
SG: What I'm wondering though in terms of monetary policy, in terms of policy makers at the Fed. If the economy does pick up in the second half of the year, will we see a shift in the approach to monetary policy, from cutting rates to perhaps raising rates?
Fisher: Well, I can only speak for myself and I even think there it's dangerous to speculate about what we might do under certain hypothetical scenarios. I think the key point is the following. As we decide where rates should be, we have to be mindful that there is a lag. It takes a while for policy to kick in. And even when we make decisions now, we have to be mindful of the fact that they may kick in.. the rubber may hit the road... 6 months or further down the road. If we expect an economic pick up to occur in the second half of this year, as I do... say during the third quarter.. then the decisions we take now are important in terms of impacting what might be happening then. And that's one of the reasons I personally was reluctant to cut rates further than 3-1/2 percent. Now again, depending on whatever data comes in, that viewpoint may change. I think it's a... We have to be very careful to work with the assumption that we can change courses radically, that we can suddenly shift our monetary policy. That's not the way central banks typically operate. I'm not sure that's the way central banks should operate. But what I will tell you is the following: It's the considered judgment of the committee, and remember that I was the sole dissenter, in their wisdom that this is the right policy, bearing in mind that there is a lag to monetary policy. It takes a while to kick in and this is the level best judgment that the committee made. And I hope that your viewers are comfortable with the fact that a lot of thought goes into this process, bearing in mind that we're looking down the road as far as we're able to look and not just making decisions based on a knee-jerk reaction.
SG: Well, many people have argued that in the last down cycle the Fed was slow to reverse course. Do you think the Fed will be quicker in picking up rates this time around and is this something that policy makers talk about and think about?
Fisher: I think it's premature to talk about picking up rates. Right now we're just trying to get it right. A lot of consideration, a lot of deliberation goes into this. This is not a trigger finger oriented organization, nor is it a trigger finger oriented committee. So an enormous amount of study and effort and anecdotal evidence and thought goes into this process. And I think it's best to let our own actions speak... our words speak for themselves when we change policy and when we say what we do after each one of our meetings.
SG: Mr. Fisher, thank you for your time. We appreciate you talking to Nightly Business Report.
Fisher: Thank you Susie.
To see this interview in video and get other information about this topic, visit our Learn More page: 02-26-08 Learn More
