US Federal Reserve Bank of Dallas president Richard Fisher said fiscal discord has led to the US government playing a suppressive role in the economy’s recovery and the central bank should transition back to interest-rate driven monetary policy as soon as possible.
“I am not a proponent of increasing government spending without restraint,” Fisher, who will hold a vote on monetary policy next year, said a speech in Sydney yesterday. “The excessively over-indebted US government has, as mentioned, been hog-tied — prevented from providing stimulus. It has thus played a counter-cyclical, suppressive role.”
Fisher said the views expressed were his own.
A deadlock over the federal budget led to a 16-day partial shutdown of the US government last month.
“We have a government that hasn’t been able to agree on a budget in five years; that has historically, under both Republican and Democrat presidents and Congresses, spent money and committed itself to fund long-term programs without devising revenue streams to cover current costs or fund future liabilities,” Fisher said. “The inability of our government to get its act together has countered the pro-cyclical role of the Federal Reserve.”
Asked by an audience member after the speech whether he could envisage circumstances in which the bond purchasing program was increased, rather than tapered, Fisher said he personally could not see the balance sheet being expanded further than what is currently expected by the market.
“I think at the earliest possible moment we need to focus on transitioning back to having an interest-rate driven monetary policy,” he said.
“I can envisage us holding the base rate low for a very long time until we see an acceleration in the economy and especially in our case given our mandate on employment, as long as inflation stays in its current range, at less than 2 percent,” Fisher said.
In his criticism of the US government in the address, Fisher noted that private expenditures on goods and services in the US increased at a 3.2 percent rate over the expansion to date, whereas GDP has risen at 2.2 percent.
“One could say that GDP would have risen at 3.2 percent had government expenditure increased at the same rate as private expenditure,” he said. “Or, more modestly, if government spending had just been held constant, instead of contracting, GDP would have grown at an annual rate of 2.6 percent.”
The government suspension shaved at least 0.6 percent from fourth-quarter this year GDP growth, or took US$24 billion out of the US economy, Standard & Poor’s said last month.
“Under these circumstances, it is no small wonder American businesses are not expanding and growing jobs at the pace we at the Fed would like to see,” Fisher said. “It is no small wonder that our economy is growing at a substandard pace compared to previous recoveries. It is no small wonder that the most expansive monetary policy the Federal Open Market Committee has ever engineered has been hampered from accomplishing what it set out to do.”
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