Once again, Fred president Fisher dissented from the Fed's decision.
Here is his logic:
I have posited both within the FOMC and publicly
for some time that there is abundant liquidity available to finance
economic expansion and job creation in America. The banking system is
awash with liquidity. It is a rare day when the discount windows―the
lending facilities of the 12 Federal Reserve banks―experience
significant activity. Domestic banks are flush; they have on deposit at
the 12 Federal Reserve banks some $1.6 trillion in excess reserves,
earning a mere 25 basis points―a quarter of 1 percent per annum―rather
than earning significantly higher interest rates from making loans to
operating businesses. These excess bank reserves are waiting on the
sidelines to be lent to businesses. Nondepository financial
firms—private equity funds and the like―have substantial amounts of
investable cash at their disposal. U.S. corporations are sitting on an
abundance of cash―some estimate excess working capital on publicly
traded corporations’ books exceeds $1 trillion―well above their working
capital needs. Nonpublicly held businesses that are creditworthy have
increasing access to bank credit at historically low nominal rates.
I have said many times
that through the initiatives we took to counter the crisis of 2008–09,
and the dramatic extension of the balance sheet that ensued, the Fed
has refilled the tanks needed to fuel economic expansion and domestic
job creation. Though I questioned the efficacy of the expansion of our
balance sheet through the purchase of Treasury securities known as
“QE2,” I have come to expect that the Federal Open Market Committee
would continue to anchor the base lending rate at current levels and
also maintain our abnormally large balance sheet, now with footings of
almost $2.9 trillion, for “an extended period.”
I do not believe it wise
to commit to more than that, or to signal further accommodation, when
the cheap and abundant liquidity we have made available is presently
lying fallow, and when the velocity of money remains so subdued as to
be practically comatose. At the FOMC meeting, the committee announced
that it “currently anticipates that economic conditions … are likely to
warrant exceptionally low levels for the federal funds rate at least
through mid-2013.” In monetary parlance, that is language designed to
signal that we are on hold until then.
So -- in short, there is already ample cash in the system which is not being lent. Let's take a look at the underlying data he is relying on.
First -- there are plenty of excess reserves:
The above charts show that since the beginning of our current economic problems, banks have been massively increasing their excess reserves. This indicates there is ample liquidity from which to make loans. The last chart is best, largely because the recent experience is so disproportionate to the historical experience. However:
We're still seeing very weak to non-existent loan growth. From the top down, commercial and industrial loans are growing weakly, consumer loans are moving lower (the spike was caused by technical factors, not actual loan growth) and real estate loans are still decreasing.
I find it very interesting that he notes the incredibly low levels of monetary velocity in the system right now -- something I've highlighted several times (most recently,
here). Just to reiterate, here are the relevant charts:
In short, there are simply a dearth of transactions occurring right now; people have hunkered down and are spending as little money as possible. This is a big reason for the increase in personal savings we've seeing over the last few years as well as the high cash balances at corporations.
At this point, I think it's fair to characterize Governor Fisher's argument as, "we've already done all we can do and it's not helping. We've not going to reverse our decision -- we're not going to start depleting these excess reserves -- but we can only do so much."
First, in reporting my
views to the committee, I noted my concern for the fragility of the
U.S. economy and weak job creation. It might be noted by the press here
today that although I am constantly preoccupied with price
stability―in the aviary of central bankers, I am known as a “hawk” on
inflation―I did not voice concern for the prospect of inflationary
pressures in the foreseeable future. Indeed, the Dallas Fed’s trimmed
mean analysis of the inflationary developments in June indicated that
the trimmed mean PCE turned in its softest reading of the year. The trimmed mean analysis
we do at the Dallas Fed focuses on the price movements of personal
consumption expenditures. It is an analysis that tracks the price
movements of 178 items that people actually buy, such as beer,
haircuts, shoe repair, food and energy prices. In June, the trimmed
mean came in at an annualized rate of 1.3 percent, versus 2.1 percent
for the first five months of the year. The 12-month rate was 1.5
percent.
My concern is not with
immediate inflationary pressures. Core producer prices are still
increasing at a higher than desirable rate. But I have suggested to my
colleagues that while many companies have begun and will likely
continue to raise prices to counter rising costs that derive from a
range of factors—including the run-up of commodity prices in 2010 and
increases in the costs of production in China—weak demand is beginning
to temper the ability of providers of goods and services to
significantly raise prices to consumers.
For more on the Dallas Fed's trimmed mean PCE tool,
see this link. What is important to recognize is that -- despite Fisher being an inflation hawk -- inflationary concerns are not the reason for his dissent. This is an important point -- and one that I don't think has been made with enough emphasis in the press.
My concern is with the
transmission mechanism for activating the use of the liquidity we have
created, which remains on the sidelines of the economy. I posit that
nonmonetary factors, not monetary policy, are retarding the willingness
and ability of job creators to put to work the liquidity that we have
provided.
I have spoken to this
many times in public. Those with the capacity to hire American
workers―small businesses as well as large, publicly traded or
private―are immobilized. Not because they lack entrepreneurial zeal or
do not wish to grow; not because they can’t access cheap and available
credit. Rather, they simply cannot budget or manage for the uncertainty
of fiscal and regulatory policy. In an environment where they are
already uncertain of potential growth in demand for their goods and
services and have yet to see a significant pickup in top-line revenue,
there is palpable angst surrounding the cost of doing business.
According to my business contacts, the opera buffa of the debt ceiling
negotiations compounded this uncertainty, leaving business
decisionmakers frozen in their tracks.
I would suggest that
unless you were on another planet, no consumer with access to a
television, radio or the Internet could have escaped hearing their
president, senators and their congressperson telling them the sky was
falling. With the leadership of the nation―Republicans and Democrats
alike―and every talking head in the media making clear hour after hour,
day after day in the run-up to Aug. 2 that a financial disaster was
lurking around the corner, it does not take much imagination to
envision consumers deciding to forego or delay some discretionary
expenditure they had planned. Instead, they might well be inclined to
hunker down to weather the perfect storm they were being warned was
rapidly approaching. Watching the drama as it unfolded, I could imagine
consumers turning to each other in millions of households, saying:
“Honey, we need to cancel that trip we were planning and that gizmo or
service we wanted to buy. We better save more and spend less.” Small
wonder that, following the somewhat encouraging retail activity
reported in July, the Michigan survey measure of consumer sentiment
released just recently had a distinctly sour tone.
Importantly, from a
business operator’s perspective, nothing was clarified, except that
there will be undefined change in taxes, spending and subsidies and
other fiscal incentives or disincentives. The message was simply that
some combination of revenue enhancement and spending growth cutbacks
will take place. The particulars are left to one’s imagination and the
outcome of deliberations among 12 members of the Legislature.
Now, put yourself in the
shoes of a business operator. On the revenue side, you have yet to see
a robust recovery in demand; growing your top-line revenue is vexing.
You have been driving profits or just maintaining your margins through
cost reduction and achieving maximum operating efficiency. You have
money in your pocket or a banker increasingly willing to give you credit
if and when you decide to expand. But you have no idea where the
government will be cutting back on spending, what measures will be
taken on the taxation front and how all this will affect your cost
structure or customer base. Your most likely reaction is to cross your
arms, plant your feet and say: “Show me. I am not going to hire new
workers or build a new plant until I have been shown what will come out
of this agreement.” Moreover, you might now say to yourself, “I
understand from the Federal Reserve that I don’t have to worry about the
cost of borrowing for another two years. Given that I don’t know how I
am going to be hit by whatever new initiatives the Congress will come
up with, but I do know that credit will remain cheap through the next
election, what incentive do I have to invest and expand now? Why
shouldn’t I wait until the sky is clear?”
Based on past behavior
of fiscal policy makers, businesses understandably regard the debt
ceiling agreement and the political outcome of negotiations between
Congress and the president with the suspicion akin to how the British
humorist P.G. Wodehouse regarded his aunts: “It is no use telling me
there are bad aunts and good aunts,” he wrote. “At the core they are all
alike. Sooner or later, out pops the cloven hoof.”[
2]
It will be devilishly
difficult for businesses to commit to adding significantly to their
head count or to meaningful capital expansion in the United States
until clarity is achieved on the particulars of how Congress will bend
the curve of deficit and debt expansion and the “cloven hooves” are
revealed. No amount of monetary accommodation can substitute for that
needed clarity. In fact, it can only make it worse if business comes to
suspect that the central bank is laying the groundwork for eventually
inflating our way out of our fiscal predicament rather than staying
above the political fray—thus creating another tranche of uncertainty.
In short, Fisher's primary argument is uncertainty is the primary issue retarding borrowing growth. At this point, I would like to add my comments to this analysis.
1.) In my business dealings, I have heard some of the same arguments, especially related to the actual implementation of the health care law. A friend who is an attorney that works for a third party health care provider spent the better part of a year working through the regulations; they are dense and confusing. If this was a non-core benefit -- that is, if the legislation impacted an area ancillary to traditional benefits provided by employers -- I would let it slide. However, this is a core issue, meaning the complexity is an issue. Let me also add -- I'm not arguing against the law (in fact, I actually know very little about it and so can't comment on its substance). But, anytime there is a change of this magnitude (and this is a big and confusing change), it will have a negative effect on sentiment.
2.) Is this regulatory uncertainty enough to add downward pressure on sentiment to such a degree as to seriously hinder hiring? No. I still think the main issue facing the economy is lack of demand. While retail sales are increasing, they are still below pre-recession peaks. Real PCEs have moved higher, but just recently. And the
- low levels of monetary velocity,
- high levels of personal savings,
- high unemployment,
- very low consumer sentiment and
- continued decrease in the household debt ratio
indicates people are just not spending at high enough rates to get the economy moving. In an economy where 70% of growth is consumer driven, this is nearly fatal to the idea of strong growth.
3.) At this point, let me briefly address an underlying assumption to Fisher's argument: that of Ricardian Equivalence, or,
more specifically:
An economic theory that suggests that when a government tries to
stimulate demand by increasing debt-financed government spending, demand
remains unchanged. This is because the public will save its excess
money in order to pay for future tax increases that will be initiated to
pay off
the debt. This theory was developed by David Ricardo in the nineteenth
century, but Harvard professor Robert Barro would implement Ricardo's
ideas into more elaborate versions of the same concept.
Some will look at the high rate of current savings and say the above theory is true; people are saving to deal with their anticipated high level of taxes coming down the pike. To this, I would respond with, "why did the savings rate decrease during the 1980s when the government also ran massive deficits?" Put another way, during another time of incredibly high government deficit spending, consumer savings dropped, blowing a fairly large hole in this argument.
4.) We are in a period of massive upheaval caused by a myriad number of issues, but with the largest factor being the worst recession since the great depression (overall, I think the best explanation of where we are now is provided by
Barry Ritholtz's book Bail Out Nation). The only way to prevent this situation from occurring again is through a massive regulatory overhaul. Additionally, there are incredibly large systemic problems in the economy (such as health care) which can only be dealt with through big changes. In short, the "regulation is killing business" argument can just as easily be characterized as, "we received massive benefits from the old way of doing things and may not get those same benefits from the new system, so we're going to complain loudly about the changes."
In conclusion, I do believe there is statutory/legislative uncertainty right now. But, I also think a massive pick-up in demand would tamp that level of concern down in a big way. In short, if businesses were making more money, the "regulatory uncertainty" argument would go out the window.
