Richard W Fisher: The limits of the powers of central banks
Remarks by Mr Richard W Fisher, President and Chief Executive Officer of the Federal
Reserve Bank of Dallas, on the Limits of the Powers of Central Banks (with metaphoric
references to Edvard Much's Scream and Sir Henry Raeburn's The Reverend Robert Walker
Skating on Duddingston Loch, at St Andrews University, St Andrews, Scotland, 5 June 2012.
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The views expressed by the author do not necessarily reflect official positions of the Federal Reserve System.
Thank you, Professor Sutherland. I am delighted to be here at St. Andrews and very much
appreciate your organization of this meeting today. To be at the site where John Knox
preached an epic sermon about Christ's cleansing of the temple and overthrowing the money
changers' tables, which was so powerful that it led to riots against the establishment of the
time, the papacy, is daunting - nearly as much so as playing the Old Course on yesterday's
bank holiday with Professor Andy Mackenzie, the university's great scratch golfer and noted
physics professor.
In a setting as august as this one - on the eve of the 600th anniversary of this great
academy - and speaking on the day marking the 129th anniversary of the birth of
John Maynard Keynes and the 289th anniversary of the baptism of Adam Smith in nearby
Kirkcaldy - I should disclose up front that I am the least formally trained among the mostly
academic economists who sit at the table where we make monetary policy at the Federal
Reserve, the 19-person forum known as the Federal Open Market Committee, or FOMC. I
have an MBA, not a PhD. I am an autodidact when it comes to monetary theory. On the other
hand, I am the only participant in our policy deliberations who has been both a banker and a
professional money manager - the only one who has been a market operator. What the
credentialing gods denied me, the practitioner angels kindly granted me: another skill set that
provides a complementary perspective to those of my more learned colleagues. I shall speak
today, as I always do, only from my perspective; nothing I say represents the thinking or
proclivities of other members of the FOMC. And most of what I will say will confront theory
with my interpretation of the rude reality of the marketplace.
A quick primer on the Federal Reserve's structure
For those of you who do not know well our central bank's structure, a quick primer. The
Federal Reserve is the third central bank in American history. We were created during
Woodrow Wilson's presidency, in the aftermath of the Financial Panic of 1907. Congress
passed the Federal Reserve Act in 1913; like St. Andrews, we will mark a centennial next
year, but it will be our first, while you celebrate your sixth.
The Federal Reserve Act established 12 Federal Reserve Banks, together with a Board of
Governors. The members of the Board, of which Ben Bernanke is Chairman, are appointed
by the president of the United States and confirmed by the Senate. The 12 Bank presidents
are not: They serve at the pleasure of nine-member boards of directors composed of private
bankers and citizens from their respective districts. They are distinctly nonpolitical, immune
from partisan influence; they represent Main Street, not the Washington power elite or the
New York money changers, just as President Wilson and the Federal Reserve founders
envisioned. These are profit-making banks that perform services for the private banks in their
districts: warehousing and distributing currency; operating discount windows from which
banks borrow to assist in their operating funding needs; functioning as the depository for the
$1.5 trillion or so in excess reserves presently piled up and going unused in our private
banking system. The Banks also house and manage staff that supervise and regulate banks
in the districts (under policy guidance from the Board of Governors), and perform other
services, the most widely observed and commented upon of which is the operating of the
open-market operations conducted by the Federal Reserve Bank of New York on behalf of all
12 Banks at the instruction of the FOMC. All 12 Bank presidents serve on the FOMC
together with the seven members of the Board of Governors. This is where monetary policy
for the United States is determined by collective decision. The operating procedure of the
FOMC is for each of the governors to have a vote on policy; the bankers rotate their votes,
with the New York Fed having a constant vote. However, all 19 members - the seven
governors and the 12 bankers - participate fully in every FOMC meeting and actively
contribute to policy discussions.
The FOMC has traditionally decided the federal funds rate, the overnight rate for interbank
lending that anchors the yield curve. In recent years, in reaction to the Financial Panic of
2008 and 2009 and its aftermath, the FOMC has instructed the New York desk to buy
mortgage-backed securities and Treasury notes and bonds - eschewing Treasury bills.
Presently, the Fed holds more than $850 billion in mortgage-backed securities (MBS) and
over $1.6 trillion in Treasuries. This expansion of our portfolio and extension of maturities
held therein is known as "quantitative easing", or QE. After cutting the base rate for overnight
lending - the fed funds rate - to zero, the majority of the committee decided to expand the
money supply by purchasing MBS, notes and bonds. When we buy something in the
marketplace, we pay for it, and this has resulted in significant liquidity floating about the U.S.
economy, much of it going unused. As mentioned earlier, $1.5 trillion of excess reserves
from private banks is on deposit in the 12 Federal Reserve Banks, where it earns a paltry
0.25 percent, rather than being lent to job-creating businesses at rates bankers would prefer.
Additionally, some $2 trillion of excess cash is parked on corporate balance sheets - above
and beyond the operating cash flow needs of the business sector - and copious amounts of
cash are lying fallow in the pockets of nondepository financial institutions, such as private
equity and other investment funds.
A running discussion in the marketplace centers around whether the FOMC will decide to
engage in further quantitative easing, especially given the most recent economic weakness
in the U.S., against the backdrop of the well-known problems in Europe and slower growth in
China and other "emerging" economies. I shall turn to that in a few moments. First, I want to
go back to the 12 Federal Reserve Banks.
Different growth patterns in the 12 Federal Reserve districts
Here is a map of the 12 Federal Reserve Bank districts. The Federal Reserve Bank of Dallas
is responsible for the Fed's activity in the light green area - the Eleventh District - home to
27 million people in Texas, northern Louisiana and southern New Mexico. Roughly
96 percent of the district's output comes from Texas.
Here is a chart showing the disparate behavior of the economies in the 12 Federal Reserve
Districts, as measured by employment growth. You will see that going back to 1990 - some
22 years - the Eleventh Federal Reserve District has outperformed the other Federal
Reserve Districts in job creation.
In terms of employment, the Dallas Fed's district went into the recession last and was one of
the first to come out. We have since punched through previous peak employment levels.
Here is the job creation record of the so-called mega-states within the United States since
1990. And last, and just for fun, here is the record of Texas' job creation over the past two
decades versus resource-rich countries, such as Australia and Canada, as well as versus the
major countries of Europe, the U.S. and Japan.
Indulge me for a minute here. I share these with you not to engage in stereotypical "Texas
brag" or because St. Andrews has become a popular destination for recent generations of
undergraduate scholars from Texas. I do so to illustrate a point, specifically the influence of
fiscal policy on the effectiveness of monetary policy.
The limits of monetary policy and the importance of fiscal policy
Here is the rub. As mentioned, the FOMC sets monetary policy for the nation, for all
50 states - its influence is uniform across America. The same rate of interest is charged on
bank loans to businesses and individuals in Texas as is charged New Yorkers or the good
people of Illinois or Californians; Texans pay the same rates on mortgages and so on. Why is
it that the Texas economy has radically outperformed the rest of the states? A cheap answer
is to revert to the hackneyed argument that Texas has oil and gas. It is true that we produce
as much oil as Norway and almost as much natural gas as Canada. And we have some
60 percent of the refineries of the United States. But remember that the numbers I showed
you are employment numbers. Only 2 percent of employment in Texas is directly generated
by oil and gas and mining and related services. We are grateful that we are energy rich. But
we are a diversified economy not unlike the United States, where business and financial
services, health care, travel and leisure activities and education account for similar portions
of our workforce. Why, then, do we outperform the rest of the United States?
To me, the answer is obvious: We have state and local governments whose tax, spending
and regulatory policies are oriented toward job creation. We have the same monetary policy
as all the rest; our income is taxed at the same federal tax rate; and we are equally impacted
by Washington's tax, spending and regulatory policies. But we have better fiscal policy at the
state level. We have no state income tax; we are a right-to-work state; we have state and
local governments that, under both Democratic and Republican leadership, have for decades
assiduously courted job creators - so much so that we have even outperformed the job
creation of most every other major industrialized economy worldwide, as shown by the
previous slide.
Whither monetary policy?
Now, back to the hue and cry of financial markets, and the question of further monetary
accommodation. Interest rates are at record lows. 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?
A good theoretical macroeconomist can acknowledge that a great deal of liquidity is, indeed,
going unused at present. They might likely argue that further monetary accommodation
would raise inflationary expectations by magnifying the fear that the Fed and other monetary
authorities are hell-bent on expanding their balance sheets and, consequently, the money
supply so dramatically that inflation will inevitably follow. The result, the good
macroeconomist would deduce, would be salutary: It would scare money out of businesses'
pockets and into job expansion and would lead individuals to conclude they better spend
their money today rather than have it depreciated by inflation tomorrow, thus pumping up
consumption and final demand.
I beg to differ. 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.
Raeburn versus Munch
There is no question that these are worrisome times: The world economy is slowing,
joblessness is rampant in many countries, and in the United States, growth is anemic and
unemployment remains unacceptably high. To me, this means that the Fed, and all central
banks, must keep their heads about them and not give in to the convenient
recommendations of those who are given to solving all problems with monetary policy.
If only for your visual pleasure, I have chosen two paintings anybody in the vicinity of
St. Andrews and Edinburgh would know, in order to illustrate alternative approaches to
central banking at this juncture.
The Reverend Robert
The first is an icon of Scottish culture: Sir Henry Raeburn's depiction of
Walker Skating on Duddingston Loch, a seminal work in the permanent collection of the
Scottish National Gallery and a favorite of mine since I first saw it some 30 years ago.
To me, Raeburn's work provides a fitting visual metaphor for the ideal countenance of a
central banker: The Reverend Walker skating forward confidently and with grace upon a
notably uneven, rocky surface on an icy, dark, blustery day.
The Scream
An alternative depiction is Edvard Munch's from Norway's Gunderson
Collection, now on temporary exhibit at the National Gallery. (There are four versions of this
pastel, one of which recently sold for $119.9 million at auction at Sotheby's. If you haven't
been into Edinburgh to see the Gunderson version, I am sure you read about Sotheby's
record-setting auction.)
In sharp contrast to Raeburn's painting of composure, The Scream depicts a panicked form.
In an autobiographical epigraph, Munch wrote that he conceived of the painting after a period
of exhaustion and despair: "I stopped and leaned against the balustrade, almost dead with
fatigue. Above the blue-black fjord hung the clouds, red as blood and tongues of fire. My
friends had left me, and alone, trembling with anguish, I became aware of the vast, infinite
cry of nature".1
I am going to conclude by suggesting that the image that best behooves central bankers as
guardians of financial stability and agents of economic potential is that of Henry Raeburn's
Reverend Walker. To be sure, central bankers everywhere are fatigued and exhausted and
increasingly friendless. But when the landscape is dark and threatening, those charged with
making monetary policy must comport themselves with a grace that reassures markets and
the public that they are calmly in control of the sacred charge with which they have been
entrusted. They must keep their "cool" even when the vast, infinite cry of the money
changers reaches a fevered pitch, the economic seas are blue-black and the clouds in the
financial markets are red as blood and tongues of fire. Presenting an image comparable to
that of the visage depicted by Edvard Munch - of policymakers trembling with anguish at the
daunting demands of their profession - would provide scant comfort to those who depend
upon them to maintain their composure and skate ably across a cold and foreboding
economic landscape, seeking to guide the economy to a better place.
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.
Thank you.