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Fischer's Departure Could Make Fed Unstable

Fischer's Departure Could Make Fed Unstable
Stanley Fischer (Susan Walsh/AP)

By    |   Thursday, 07 September 2017 03:52 PM

Federal Reserve Vice Chair Stanley Fischer has submitted his resignation although his term was due to expire in the middle of next year.

This is somewhat troubling as Fischer was assumed to provide a degree of stability in the event that Fed Chair Janet Yellen should be replaced by somebody unsuitable.

It also means that counting Yellen, whose return isn't automatic, there are five positions at the Federal Reserve that President Donald Trump can fill in the coming months.

Fed independence is crucial and it makes it all the more important that a multiple-year strategy for dealing with quantitative policy is “cemented” into place sooner rather than later.

We also had the Fed’s "Beige Book" economic report of anecdotal evidence of the United States that remained supportive of the idea of tightening.

Decent growth and tightening labor markets are reported, with construction and manufacturing in particular having difficulty in finding adequate as well as overall suitable labor.

The one area of weakness in production and in consumer sales was in the auto sector. The fact that this weakness was so specific suggests that it may be a sector specific issue. Perhaps, younger Americans are less animative for cars rather than a macro-economic issue.

Besides all that, Trump has done a deal with the Democrats in Congress to raise the debt ceiling and the budget limit, which should provide some relief for the Treasury bills markets, which have been more in about the prospect of a “default” situation.

Over in Europe, the European Central Bank (ECB) did not announce a tapering of its bond buying or a reduction of its quantitative accommodation.

On the contrary, the ECB’s press communique reads: “… To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for a continued very substantial degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2 percent.”

Yes, one could easily say that circumstances have not allowed to do enough preparatory work for starting a reduction of quantitative accommodation, and so it now seems that October could, which absolutely doesn’t mean will be the most likely date for the announcement of any change in the current ECB policy.

No, the Euro area simply does not need the degree of accommodation that is currently applied by the ECB.

As we all know, ECB President Mario Draghi is on the dovish wing of the dovish faction of the European Central Bank and today he has, once again, exercised, as expected, his rights at the press conference to give a dovish spin on events and said during the press conference: “Euro-zone growth projections for 2017 have been revised up, but inflation forecasts have been revised down; and positive cyclical risks to the forecasts are offset by negative global factors.”

Moreover, there is the question of the euro. The euro’s rise this year is not unexpected, nor is it unjustified. The euro was grossly undervalued and should have risen as it did.

However, a rapid and sizable rise is disruptive.

Exporters always complain, but frankly any exporter’s account managers say that a 10 percent move in the currency over the course of a year doesn’t deserve to be in business. However, a more aggressive move over the course over a shorter period of time is potentially damaging to business.

The question is how Draghi will manage to communicate a desire for euro stability. Investors could do well keeping in mind that the ECB’s own forecasts are anchored on an exchange rate of circa $1.18 per euro and that any spike above that level will be a complicating factor.

Finally, we got the German production data, which in July increased 4 percent year-over-year (y/y), which is of course a very good number that confirms the ongoing upward trend.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Fischer was assumed to provide a degree of stability in the event that Fed Chair Janet Yellen should be replaced by somebody unsuitable.
fed, fischer, yellen, trump
Thursday, 07 September 2017 03:52 PM
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