Tags: Fed | Fisher | Policymakers | Dollar | Impact

Fed’s Fisher: Policymakers Must Be Aware of Dollar Impact

Friday, 22 October 2010 12:23 PM

Federal Reserve officials need to be mindful of the effect their actions are having on the dollar, said Richard Fisher, president of the Fed bank of Dallas and a former deputy U.S. trade representative.

“We need to be aware of the impact whatever we do has on other variables, and one of the variables is the dollar, the value of the dollar against other currencies,” Fisher said in an interview this week at Bloomberg’s headquarters in New York.

The U.S. currency has slumped more than 6 percent against six major counterparts since Aug. 27, when Chairman Ben S. Bernanke said the Fed “will do all that it can” to keep the recovery going and that more securities purchases may be warranted. Fisher is one of four regional Fed presidents who have questioned the effectiveness of further easing.

The central bank’s actions aren’t the only influence on the dollar, said the 61-year-old regional bank chief, a former hedge fund manager who votes on the rate-setting Federal Open Market Committee next year. “It’s also perceptions of our long-term fiscal health,” he said.

Fisher also expressed skepticism about so-called price-level targeting, a strategy for raising the inflation rate supported by Charles Evans, president of the Chicago Fed. Some policymakers are concerned that a declining inflation rate is pushing up the cost of borrowing in real terms, threatening to slow the economy.

Congressional Mandate

“Price-level targeting has only been attempted once before, in Sweden in the 1930s,” Fisher said. “It will be discussed, but it is very confusing to the American people.”

Because the Fed’s congressional mandate calls for keeping inflation low and stable while also maximizing employment, a price-level target could prompt calls from lawmakers for an employment goal, Fisher said.

“Given that we operate under a dual mandate, Congress might insist we also have an employment-level target. Personally, I would be happy with an inflation target, but I don’t think Congress would tolerate it.”

Fisher has twice this month reiterated his view in speeches that further monetary easing isn’t a certainty, telling a New York audience on Oct. 19 that “no decisions have been made on these fronts” and won’t be until after the FOMC’s next meeting, on Nov. 2-3.

That’s in contrast to views of investors such as Scott Minerd, the Santa Monica-based chief investment officer at Guggenheim Partners LLC, who helps oversee $76 billion. Minerd wrote in a newsletter that the path to a second round of quantitative easing “is clearly paved,” based on the “trail of bread crumbs” left by other Fed officials’ statements.

Fed Statement

The FOMC on Sept. 21 reinforced expectations that it will restart large-scale asset purchases, saying it’s “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Four Fed presidents — Chicago’s Evans, Atlanta’s Dennis Lockhart, New York’s William Dudley and James Bullard of St. Louis — in speeches this week reinforced the idea that a new round of unconventional monetary stimulus is likely.

Bullard, speaking yesterday in St. Louis, proposed that the Fed start buying $100 billion in Treasuries and calibrate subsequent purchases based on the recovery’s course.

Fisher said in his speech in New York this week that “the efficacy of further accommodation using nonconventional policies is not all that clear.”

Concerns Shared

Similar doubts have been expressed since Sept. 21 by Presidents Thomas Hoenig of Kansas City, Philadelphia’s Charles Plosser and Narayana Kocherlakota in Minneapolis.

Treasuries fluctuated amid speculation about how much U.S. debt the Federal Reserve may buy if it resumes purchases.

The benchmark 10-year note yield rose one basis point to 2.56 percent at 11:43 a.m. in New York after falling as much as two basis points. Its high for the year was 4.01 percent in April.

The Dollar Index, used by IntercontinentalExchange Inc. to track the dollar against six major U.S. trading partners including the euro, yen, pound and Canadian dollar, fell 0.1 percent to 77.475. It has dropped 6.5 percent since Aug. 27.

“I want to be very careful not to read into short-term movements longer-term trends,” Fisher said in response to audience questions about the dollar’s decline after his speech this week.

Perceptions of Strength

“The answer to any currency is that it’s going to be valued according to perceptions of the strength of the underlying issuer,” he said. “The dollar is the key currency in the world.”

Fisher, president of the Dallas Fed since 2005, worked as an assistant to former Treasury Secretary W. Michael Blumenthal in the Carter administration during the dollar crash of 1978, when high inflation and Blumenthal’s policy of “benign neglect” toward the U.S. currency shook investor confidence.

The regional bank chief told Bloomberg Television in a 2004 interview that he’d been “conditioned” by the memory of being a 29-year-old accompanying Blumenthal to a meeting with the president on Nov. 1, 1978, the day that Fed and Treasury were forced to launch an emergency rescue package.

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Federal Reserve officials need to be mindful of the effect their actions are having on the dollar, said Richard Fisher, president of the Fed bank of Dallas and a former deputy U.S. trade representative. We need to be aware of the impact whatever we do has on other...
Friday, 22 October 2010 12:23 PM
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