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Fed's Fisher: Fiscal Clarity Is Needed to End Uncertainty

Wednesday, 15 August 2012 05:49 PM

The Federal Reserve's monetary policy tools are powerless against the main threat to the country's recovery — uncertainty, said Richard Fisher, president of the Federal Reserve Bank of Dallas.

Since the downturn four years ago, the Federal Reserve has taken steps to stimulate recovery, including slashing benchmark interest rates to near zero and rolling out unorthodox policies such as quantitative easing.

Under quantitative easing (QE), the Fed buys Treasury holdings and mortgage-backed securities held by banks, pumping the financial system full of liquidity to further drive down interest rates to boost the economy.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Low rates encourage companies to expand but if they don't know if taxes will rise or how much healthcare will cost, they won't invest, and in turn, they won't hire and recovery remains tepid, Fisher said.

Calls for more stimulus have risen in recent weeks due to low growth rates and high unemployment numbers, but the Fed can't help, Fisher said.

"I don't believe any amount of monetary stimulus is going to deal with this uncertainty and inability of companies to budget and to plan," Fisher told CNBC.

"If you can't plan a budget, you can't spend, and if you can't spend, you can't hire."

The Fed has pumped $2.3 trillion into the economy via two rounds of quantitative easing in the past four years, though unemployment rates remain high, not due to a lack of liquidity in the economy.

Congress hasn't passed a new budget in four years, while new laws overhauling financial regulation and healthcare laws, among others. have companies guessing how their tax and cost structures will change.

Meanwhile at the end of the year, tax cuts expire right at the same time pre-programmed cuts to government spending kick in, a combination known as a fiscal cliff that could send the country back into recession next year if left unchecked by Congress.

"The real issue is asking congressmen — Republicans and Democrats — to get their act together," Fisher said.

"Something has to be done, this cannot go on, and I blame both Republicans and Democrats so we need to change and reboot this process, and I hope that whoever wins the presidential election will get Congress to finally act."

Separately Wednesday, Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, also cautioned that the Fed's power to fix the U.S. economy now is limited. Lacker, a voting member of the Fed's policy committee, told The Associated Press that the Fed can only do so much to lower the 8.3 percent unemployment rate.

"There are a lot of people overestimating the extent to which monetary policy is capable of having any sustained effect on growth or labor markets," Lacker said.

Lacker alone has dissented from the past five Fed statements that sketched out its steps intended to bolster the economy. He says the Fed has done what it can to bolster a weak economy and going further runs the risk of triggering inflation.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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Wednesday, 15 August 2012 05:49 PM
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