The Limits of Fed Power

Richard Fisher of the Dallas Fed gave another great speech yesterday, this time at Saint Andrews University in Scotland.  Be sure to read the whole thing, here are some key excerpts:

Trillions of dollars are sitting on the sidelines, not being used for job creation. We know that in areas of the country where fiscal and regulatory policy incents businesses to expand—Texas is the most prominent of those places—easy money is more likely to be put to work than in places where government policy retards job creation. During the next few weeks as I contemplate the future course of monetary policy, I will be asking myself what good would it do to buy more mortgage-backed securities or more Treasuries when we have so much money sitting on the sidelines and yet have no sense of direction for the future of the federal government's tax and spending policy. And with the president's health care legislation awaiting resolution in the Supreme Court, we also know that no business can budget its personnel costs until that case is decided. If job-creating businesses have no idea what their taxes will be, are clueless about how federal spending will impact their customers or their own businesses and cannot budget personnel costs—all on top of concerns about the risk to final demand posed by the imbroglio in Europe and slowing growth in emerging-market countries—how could additional monetary policy be stimulative?

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I would argue that this would represent a form of piling on the already enormous uncertainty and angst that businesses face with our reckless fiscal policy. To me, that would be the road to perdition for the Federal Reserve. There is in the marketplace a lingering fear that the Fed has already expanded its balance sheet to its stretching point and that an exit strategy, though articulated, remains theoretical and untested in practice. And there is a growing sense that we are unwittingly, or worse, deliberately, monetizing the wayward ways of Congress. I believe that were we to go down the path to further accommodation at this juncture, we would not simply be pushing on a string but would be viewed as an accomplice to the mischief that has become synonymous with Washington.

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Central banks are just one vehicle for influencing overall macroeconomic behavior, in addition to influencing through regulation the microeconomic agents that transmit that influence to the markets—banks of deposit and other financial institutions. We work alongside another potent macroeconomic lever: fiscal authorities—governments that have the power to tax the people's money, spend it in ways they deem appropriate, and create laws and regulations that influence microeconomic behavior.

Unless fiscal authorities can structure their affairs to incent the private sector into putting the cheap and ample money the Fed has provided to the economy to work in job creation, monetary policy will prove impotent. And we will likely barely survive our first centennial, let alone have confidence that we will reach our sixth [like Saint Andrews University].