Tags: Stanley Fischer | Federal Reserve | Critics | Board

Stanley Fischer: The Fed Whisperer, Misunderstood by Critics, Gains Sway on Board

Monday, 01 June 2015 07:54 AM

To hear Wall Street pros tell it, Stanley Fischer hasn’t lived up to his reputation as an economic heavyweight in his first year at the Federal Reserve. Don’t believe it.

Away from the public spotlight, the Fed vice chairman has played a key role in fashioning policy, those in the know say. He’s nudged the central bank away from providing explicit guidance on its interest-rate intentions and elevated its efforts to spot financial trouble spots in the U.S. and global economies.

“He has moved the needle,” said International Monetary Fund Chief Economist Olivier Blanchard, a long-time confidante who speaks with Fischer frequently.

Indeed, as the Fed prepares to begin raising interest rates for the first time in nine years, it’s taking the same adjustable approach the 71-year-old Fischer pursued a decade ago as head of Israel’s central bank. In the words of Chair Janet Yellen, policy makers “could speed up, slow down, pause or even reverse course” depending on the outlook.

In an e-mail, Yellen called Fischer a “good friend,” and said she relies on his “wise insights” in mapping out policy. The two meet at least once a week for free-wheeling discussions on the economy and other issues facing the central bank.

The picture insiders paint of Fischer as trusted adviser to Yellen contrasts with the public perception of his influence. Fed watchers generally don’t view his utterances as providing a lodestar on where rates are headed. And Wall Street executives have voiced disappointment that he hasn’t done anything to curb the regulatory zeal of powerful Fed Governor Daniel Tarullo.

Steady Hand

Fischer’s defenders say such criticism misses the point. His job is to be “one of the steady hands on the tiller during a time of great uncertainty” for the economy, not to act as a foil to Tarullo or Yellen, said Timothy Adams, president of the Washington-based Institute of International Finance, which represents close to 500 global financial institutions.

The one-time IMF official also brings a wealth of international experience and contacts to the Fed at a time when the U.S. seems more susceptible to forces from abroad. Fischer represented the central bank last week at a meeting in Dresden, Germany, of policy makers from major industrial nations.

“He’s a dean of global monetary policy, a person with a very high international reputation,” former Fed Chairman Ben S. Bernanke said in an interview. “That helps the Fed and the U.S. globally.”

Still Suffering

Fed officials have their work cut out for them. They must unwind a record-loose monetary policy that has pushed up prices of stocks, real estate and even art significantly without having nearly the same impact on an economy still suffering the after- effects of the 2007-09 recession.

“They’re in a very difficult” position, said former central bank Chairman Alan Greenspan. “There is no conceivable scenario in which it is going to be easy.”

Fischer has said there’s a high probability he and his counterparts on the Federal Open Market Committee will raise the benchmark federal funds rate this year from near zero. He’s also stressed that an increase or two merely would move the Fed from ultra-expansionary policy to very expansionary.

In a rambling lecture at Israel’s IDC Herzliya university on May 25, Fischer warned about the risk of waiting too long, saying this could force the Fed to tighten credit sharply later on to keep the economy from overheating.

‘Middle of Road’

While the one-time professor and IMF official seems more inclined to act than some others at the Fed, he describes himself as “middle of road” on the central bank’s two mandates: neither an inflation-fighting hawk nor an employment- promoting dove.

Fischer and Yellen “are extremely close on how they see the economy,” Blanchard said. “I don’t think they disagree a priori on anything big.”

“They might have a discussion on whether it’s September or December” to tighten policy, but “it’s an intellectual discussion,” with neither wedded to a particular date.

Fischer came to the Fed with an impressive resume. As a professor at the Massachusetts Institute of Technology in Cambridge from the 1970s into the 1990s, he was a mentor to many policy makers, including Bernanke and current European Central Bank President Mario Draghi.

From 1994 to 2001, he served as No. 2 policy maker at the IMF, helping to lead the battle against a series of financial crises stretching from Thailand to Brazil.

Monetary Trailblazer

Most recently, he headed the Bank of Israel from 2005 to 2013, where he earned a reputation as a trailblazer for being the first central banker to cut rates in 2008 at the start of the global crisis and the first to raise them the following year on signs of recovery.

“The great virtue of what he went through at the IMF and at the Bank of Israel was that he saw you’ve got to choose,” said former U.S. Treasury Secretary Timothy Geithner, now president of private-equity company Warburg Pincus LLC in New York. “He has a record of making decisions and coming up with novel solutions to complex problems that showed a level of creativity, a willingness to take risks.”

Fischer said in an interview he’s “beginning to feel quite at home at the Fed” after spending the last year coming to grips with a central bank and financial-regulatory system that are bigger and more complex than Israel’s. Confidantes say he’s also had to get used to the Fed’s far more formal atmosphere.

Off the Cuff

He has a looser style than many policy makers and isn’t afraid of ad-libbing in public. Within the FOMC, he speaks off the cuff rather than reading from a statement like some of his colleagues.

His openness has sometimes gotten him into trouble. At a public board meeting in December, he apparently revealed inadvertently that JPMorgan Chase & Co. was the only big bank that failed to meet new U.S. capital requirements and would have to come up with more than $20 billion by 2019 to comply.

When Fischer arrived at the U.S. central bank, he had some misgivings about its strategy of providing investors with explicit guidance on the probable path of policy, arguing the future was too uncertain to make such commitments.

Now, as the Fed lays the groundwork for changing its benchmark, it’s adopted a data-driven, meeting-by-meeting approach more to Fischer’s liking.

Increased Awareness

Mohamed El-Erian, who worked with Fischer at the IMF and is now a Bloomberg View columnist, said he wouldn’t be surprised if the vice chairman had a hand in the Fed’s increased awareness of the impact foreign influences have on the U.S. In January, the FOMC began singling out “international developments” in its policy statement as one consideration in deciding when to raise rates.

“I think increasingly what’s happening in the outside world -- the non-U.S. world -- is affecting us,” Fischer said. “We’ve seen that more in recent months than we have in a long time.”

The Fed vice chairman also has heightened the central bank’s attention to financial stability, heading a committee created at his behest to look across the spectrum for signs of trouble and plot ways to address difficulties that might arise. A current preoccupation: The recent volatility in the bond market that saw the yield on 10-year Treasury notes rise to 2.29 percent on May 13 from 1.87 percent on April 17.

“My big fear as a regulator — actually about life in general — is that I’ll be very focused on some problem and there’s another problem coming from some other direction that nobody’s noticed and, bang, it arrives. And then you aren’t ready,” he said. “What I really want is for us to be as ready as possible to deal with any problems that might come up.”

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To hear Wall Street pros tell it, Stanley Fischer hasn't lived up to his reputation as an economic heavyweight in his first year at the Federal Reserve. Don't believe it.
Stanley Fischer, Federal Reserve, Critics, Board
Monday, 01 June 2015 07:54 AM
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