Uncertainty and the Fed’s Job: More Hard Times Ahead
In an exclusive interview with Reuters, Richard Fisher (President of Dallas’ Fed) said that the Fed has done its job:
Fisher said, as he has repeatedly, that the Fed has done its job, keeping rates near zero for nearly three years and buying more than $2 trillion in long-term securities to send borrowing costs down still further.
Fisher said he still sees the lack of clarity on U.S. fiscal policy as the biggest drag on U.S. growth.
But credit problems in Europe are also hurting, and not just because a slowdown in Europe could hurt U.S. exports.
I’m not sure the job of the Fed is necessarily to keep “rates near zero for nearly three years.” If the job of the Fed is to contribute to monetary and economic stability, this seems to be a shortsighted policy; to undo all the monetary expansion that will eventually get into the market is a job that still needs to be done. I’m not so confident that this work will be done so efficiently. Such work will require very well aligned expectations. This is hard to achieve in a stress market without knowledge of the plan.
But Fisher also points to a real problem. The “lack of clarity on U.S. fiscal policy,” and the situation in Europe. What will happen with U.S. fiscal policy is relevant information for investment decisions. Are taxes going to be increased? Is public debt going to be increased? Is government spending going to be cut? If so… where, and by how much? With election time coming on shortly, this uncertainty may persist until the identity of the next president is clear and he enunciates his policy in a clear fashion.
However, this is not unrelated to the situation in Europe. Is Greece going to default and leave the Euro? If Greece leaves the Euro, will he just be the first mover in a chain of similar reactions by other countries that will result in the total abandonment of the Euro? If not, how much will the European Central Bank be willing to help the Euro Zone countries? And how does each policy affect exchange rates and foreign trade with the United States?
With the most uncertainty coming from Europe, it doesn’t seem to be the case that policy makers are solving the problem with efficiency and expediency. In the meantime, the largest central bank of the world, the Federal Reserve, keeps interest rates near zero. Troubled times are still ahead.
Nicolas Cachanosky is a doctoral student in economics at Suffolk University, as well as a previous Sound Money Essay Contest winner.
Image: nuttakit / FreeDigitalPhotos.net
Nicolás Cachanosky
Dr. Cachanosky is Associate Professor of Economics and Director of the Center for Free Enterprise at The University of Texas at El Paso Woody L. Hunt College of Business. He is also Fellow of the UCEMA Friedman-Hayek Center for the Study of a Free Society. He served as President of the Association of Private Enterprise Education (APEE, 2021-2022) and in the Board of Directors at the Mont Pelerin Society (MPS, 2018-2022).
He earned a Licentiate in Economics from the Pontificia Universidad Católica Argentina, a M.A. in Economics and Political Sciences from the Escuela Superior de Economía y Administración de Empresas (ESEADE), and his Ph.D. in Economics from Suffolk University, Boston, MA.
Dr. Cachanosky is author of Reflexiones Sobre la Economía Argentina (Instituto Acton Argentina, 2017), Monetary Equilibrium and Nominal Income Targeting (Routledge, 2019), and co-author of Austrian Capital Theory: A Modern Survey of the Essentials (Cambridge University Press, 2019), Capital and Finance: Theory and History (Routledge, 2020), and Dolarización: Una Solución para la Argentina (Editorial Claridad, 2022).
Dr. Cachanosky’s research has been published in outlets such as Journal of Economic Behavior & Organization, Public Choice, Journal of Institutional Economics, Quarterly Review of Economics and Finance, and Journal of the History of Economic Thought among other outlets.
