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Expansionary monetary policy needed: Fed nominee Fischer

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Published : 2014-03-13 20:35
Updated : 2014-03-13 20:35

Stanley Fischer, the nominee to be Federal Reserve vice chairman, said the world’s largest economy still needs the central bank’s unprecedented accommodation as joblessness remains elevated.

“At 6.7 percent, the unemployment rate remains too high,” Fischer, a former Bank of Israel governor and Citigroup Inc. vice chairman, said in remarks prepared for his confirmation hearing tomorrow before the Senate Banking Committee.

“Achievement of both maximum employment and price stability requires the continuation of an expansionary monetary policy ― even though the degree of expansion is being gradually and cautiously cut back as the Fed reduces its monthly purchases” of securities, said Fischer, 70. 
Stanley Fischer. (Bloomberg)

Also scheduled to testify tomorrow are Fed governor nominees Lael Brainard, a former U.S. Treasury undersecretary, and Jerome Powell, who has continued serving as governor after his first term ended on Jan. 31. All three nominees said the Fed must do more to dispel the perception that some large banks are “too big to fail” and could count on a government bailout.

Fischer was nominated by President Barack Obama to succeed Janet Yellen in the No. 2 post after she became chair. He has spent much of the past quarter century involved in global policy making as a former World Bank chief economist and top official at the International Monetary Fund. Yellen ― sworn in as central bank chief last month ― urged the White House to offer Fischer the Fed job.

Fischer would become Yellen’s lieutenant as she winds down the Fed’s monthly bond purchases and leads a debate among policy makers over altering forward guidance for the benchmark interest rate, which has been close to zero since December 2008.

The Federal Open Market Committee during its past two meetings cut monthly bond buying to $65 billion from $85 billion in December. Policy makers, who will next gather March 18-19, have indicated they plan to taper by $10 billion at each meeting absent a weakening in the economy. Bond purchases have pushed up the Fed’s balance sheet to a record $4.17 trillion.

Fischer also said the Fed must be “ever-vigilant” in its responsibility to supervise and regulate banks and markets, and that those priorities should be as important as monetary policy.

“The Great Recession has driven home the lesson that the Fed has not only to fulfill its dual mandate, but also to contribute its part to the maintenance of the stability of the financial system,” he said. “Almost always, these goals are complementary. But each of them must be an explicit focus of Fed policy.”

While the financial system has been strengthened, “strong regulation and supervision” are needed to maintain its vigor, he said. “Financial systems evolve, and while financial crises have many similarities, they are not identical.”

Brainard also pledged to strengthen the central bank’s role in safeguarding the financial system.

The Fed must “continue robust implementation of financial reform and enhanced supervision to ensure that no financial institution is too big to fail and to discourage the massive leverage and opaque risk taking that contributed to the financial crisis,” she said.

At the same time, the central bank should protect “the savings of retirees and sound access to credit for consumers, small businesses, students, and households seeking to own their own home,” Brainard said.

Powell said in his testimony that while the economy still needs support, the Fed must be cautious about not causing financial instability.

“Our economy continues to recover from the effects of the global financial crisis, unevenly and at a frustratingly slow pace,” he said.

“The task for monetary policy will be to provide continued support as long as necessary, and to return policy to a normal stance over time without sparking inflation or financial instability,” he said. “This will require a careful balancing, as there are risks from removing monetary accommodation too soon as well as too late.”

Fed officials at their January meeting agreed they would soon have to modify their commitment to keep the main interest rate near zero until unemployment falls below 6.5 percent, according to minutes of the gathering. They differed over the contours of any new forward guidance, the minutes showed.

Yellen said in semi-annual testimony to the banking committee Feb. 11 that she agrees with many Fed officials over the need to consider a broad range of indicators in setting policy now that unemployment is closing in on the Fed’s 6.5 percent marker. The jobless rate in February rose to 6.7 percent from a five-year low of 6.6 percent in January.

The rate nearing 6.5 percent “moves in the direction of qualitative guidance,” Yellen told lawmakers, adding, “On the other hand, we do want to give markets as much of an indication of how we expect to conduct policy as we can.”

Fischer has cautioned against forward guidance, noting hazards from committing to policies too far in the future.

“The thing I found is to be very careful about forward commitments,” Fischer said in a June interview.

“When I started as Governor I was very keen on sending signals about what we thought we’d do next,” he said, referring to his tenure at the Bank of Israel. “Then we discovered more than once that when we got there, we wished I hadn’t said it. To become and remain credible, we have to be very careful in making statements about what the future will hold.”

Fischer probably won’t oppose current policy “with the Fed going toward a more qualitative guidance,” according to Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former top Fed economist.

“I doubt Fischer will differ much from the direction the Fed is likely to go on forward guidance,” Perli said before the release of the testimony. “Qualitative really means flexible, which is exactly what Fischer has always wanted.”

While unemployment rose, employers added more workers than projected in February, indicating the U.S. economy is starting to shake off the effects of the severe winter weather that slowed growth at the start of 2014. The 175,000 gain followed a 129,000 increase the prior month that was bigger than initially estimated, Labor Department figures showed March 7.

Senator Bob Corker said to Yellen during her Feb. 27 testimony to the banking panel that he’ll support Fischer.

“I’m impressed,” said Corker, a Tennessee Republican. Fischer is a “very impressive person and I think he’s a very good complement to your background. So I’m glad that he’s being put forth and I look forward to him being confirmed.”

Democratic Senator Elizabeth Warren of Massachusetts, also on the banking committee, told Bloomberg News in January she isn’t sure Fischer is “going to work in the right direction,” without elaborating on her concerns.

Fischer, who holds both U.S. and Israeli citizenship and lives in New York, stepped down from the Bank of Israel on June 30, midway through his second five-year term as governor. While spending much of his career as an academic and government official, he served as vice chairman of Citigroup from 2002 to 2005 and built a personal fortune ranging from $14.6 million and $56.3 million, disclosure documents show.

Fischer spent much of his early career at the Massachusetts Institute of Technology in Cambridge, where he earned his economics Ph.D. in 1969 and later taught future Fed Chairman Ben S. Bernanke and European Central Bank President Mario Draghi. 

(Bloomberg)

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