Federal Reserve Vice–Chairman Stanley Fischer’s speech at the 2015 U.S. Monetary Policy Forum in New York centered on the Fed’s asset purchase program and future policy normalization based on the rate of interest paid on excess reserves. But the optimism he expressed in his remarks may be unwarranted.
Fischer suggested that the Fed’s large asset purchase program since the inception of the financial crisis in 2008 has had a meaningful effect in reshaping the economic recovery as well as helping to keep inflation close to the Federal Open Market Committee’s target of two percent.
Fisher also addressed how the Federal Reserve’s overnight reverse repurchase agreement discourages money market funds, broker–dealers, and depository institutions from lending to private counterparties at rates below those offered on overnight reverse repos by the Federal Reserve. This helps in “establishing a soft floor for money market interest rates,” says Mr. Fischer, which ultimately allows the Fed to set accommodative monetary policy when the time presents itself.
Fischer’s enthusiasm should be treated with caution. It is clear that the economy is not performing up to the expectations of the American people, or even up to the Fed’s own forecasts. Commerce Department data published on Friday show an economy that grew at 2.2 percent in the fourth quarter of 2014, proving that the higher summer rates were unsustainable. Labor force participation rates have been at 1970s levels for some time and the unemployment rate for some groups, including construction workers, still stand in the double digit range.
Further, the economic situation in Europe could have significant adverse consequences for the U.S. economy. The dismal economic prospects for Europe in combination with its unaddressed debt poses significant concern for Americans for a number of reasons, none more apparent than the dismal European economy slowing demand for American exports.
Today’s leading macroeconomists have argued vociferously for months about the causes of the reduction in aggregate demand across all consumer segments. The problems associated with the current American economy reside in what Harvard economist Lawrence Summers has coined “secular stagnation.”
Fischer reminds us that the term premium on 10–year Treasury securities has declined since the Federal Reserve’s asset purchase program in 2008. But it is unclear that the large–scale purchase of such assets since the financial crisis has provided the meaningful stimulus to the American economy that he describes. Short–term interest rates remain low and the expectation is that they will remain low in the near future. All this points to a market economy that says it is worried about generating sufficient investment demand over the medium and long term. A sustained environment with low yields and low rates has significant repercussions for continuing to produce a sluggish economic recovery.
Fischer has the all good intentions of a policymaker hoping to stimulate the American economy and raise the labor force participation rate. However, it is important to remember just how far the American economy has to grow to overcome the risks of stagnant demand and flat wage growth. Fischer should be cautious in his optimism and avoid announcing any premature victories for the American labor force. Doing so might just do the American people more good than bending the truth.
Alex Verkhivker is a contributor to e21.
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