A Conversation With Stanley Fischer

Monday, November 21, 2016
Jonathan Crosby/Reuters
Stanley Fischer

Vice Chairman, Board of Governors of the Federal Reserve System; Former Governor, Bank of Israel

Roger C. Altman

Founder and Executive Chairman, Evercore Partners, Inc.

Vice Chair of the U.S. Federal Reserve System Stanley Fischer joins Founder and Executive Chairman of Evercore Roger C. Altman to discuss issues regarding international economics. Fischer discusses monetary policy, inflation rates, growth, and the Federal Reserve's outlook on the future of the U.S. economy.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

ALTMAN: Welcome to the McColough Series on International Economics here at the Council on Foreign Relations.

We’re quite fortunate this morning to have Stanley Fischer as our honored guest. If you wanted to design the background of one of the most senior monetary officials in the world, it would be hard to design one better than Stan’s. Stan was, among other things, a professor at MIT for 27 years. He then, among other things, became first deputy managing director of the IMF, then chief economist at the World Bank, governor of the Bank of Israel, and now, of course, is vice chairman of the Federal Reserve System.

Everyone who knows Stan has enormous respect for him. I count myself in that group. I’m a big admirer of his. Stan is going to make a few remarks this morning. Then I will ask him several questions, and then we will open this up to all of you.

This is on the record this morning. And I would ask all of you please to turn off your cell phones and like devices so that none of them disturb this this morning.

With that, Stan Fischer. (Applause.)

FISCHER: Thanks very much, Roger. It’s a great pleasure to be here again, especially when the economic issues confronting the U.S. economy, and actually the world economy, are so important. But I’d better say two things before I start. First, the views I express are mine and not necessarily those of the Federal Reserve Board or the Federal Open Market Committee. And secondly, there’s a great deal of uncertainty about the future economic policies of the incoming administration, and I have no special insights into what they might be. So now let me start.

Notwithstanding a number of shocks over the past year, the U.S. economy is performing reasonably well. Job gains have been robust in recent years, and the unemployment rate has declined to 4.9 percent, which is likely close to its long-run sustainable level. After running at a subdued pace during the first half of the year, gross domestic product growth has picked up in the most recent data, and inflation has been firming towards the Fed’s 2 percent target.

But although the economy has moved back to the vicinity of the Committee’s employment and inflation targets, along some dimensions this has not been a happy recovery. Unease with the economy reflects a number of longer-term challenges, challenges that will require a different set of policy tools than those used to address cyclical shortfalls in growth.

And there are two challenges that are particularly prominent. We have very low equilibrium interest rates at the moment and we have very sluggish productivity growth in the United States and abroad.

I’ll touch first on low interest rates and then turn to productivity. On interest rates, the federal funds rate and policy rates in other advanced economies remain very low, and in some countries negative, something we didn’t—(audio break).

Such low interest rates, together with only tepid growth, suggest that the equilibrium interest rate—that’s the rate that neither boosts the economy nor slows the economy—has fallen substantially. Well, why does this matter? Importantly, low interest rates make the economy more vulnerable to adverse shocks by constraining the ability of monetary policy to combat recessions using conventional interest-rate policy. That’s because the effective lower bound on interest rates, while not zero, is not far below zero. And that means that the interest rate has less room to be cut, or that monetary policy has less room to cut the interest rate when that becomes necessary.

Also, low equilibrium rates could threaten financial stability by encouraging a reach for yield and compressing net interest margins, although it’s important to point out that so far we have not seen much evidence that low rates have notably increased financial vulnerabilities in the U.S. financial system. And more fundamentally, low-equilibrium real interest rates could signal that the economy’s long-run growth prospects are dim.

Well, why are interest rates so low? Broadly speaking, the interest rate equilibrates saving, which tends to reduce the interest rate, and the demand for investment, which tends to raise the interest rate.

In a speech last month, I identified a number of factors that have worked to boost saving, depress investment, or both. Among the factors holding down interest rates are first the sluggishness of foreign economic growth; second, demographics, with saving, which tends to happen later in people’s lives, before they retire, with saving being higher as a result of an increase in the average age of the U.S. population.

Third, investment recently has been weaker than might otherwise be expected, perhaps reflecting uncertainty about longer-run growth prospects, as well as the decline in the investment—in investment in the energy sector as a result of the fall in the price of oil.

And fourth, finally, and most important, weak productivity growth has likely pushed down interest rates both by lowering investment, as firms lower their expectations for the marginal return on investment, and by increasing saving, as consumers lower their expectations for income growth and borrow less and/or save more as a consequence.

So the interest-rate problem is there. And now let me move on to productivity growth.

Understanding the recent weakness of productivity growth is central, absolutely central, to addressing the longer-run challenges confronting the economy. Productivity growth over the past decade has been lackluster by post-World War II standards. Output per hour increased by 1 ¼ percent per year, on average, from 2006 to 2015—that’s 1 ¼ percent—compared with its long-run average of 2 ½ percent from 1949 to 2005. This halving of productivity growth, if it were to persist, would have wide-ranging consequences for living standards, wage growth, and economic policy more broadly.

Well, why? There is the Rule of 72. If you need to know how long it takes something growing at rate X to double, you divide 72 by X. And the answer to that question, to that problem, is the number of years it takes for something to double. If output-per-hour is growing at 2 ½ percent, it takes just under 30 years, about a generation, to double. If it’s growing at 1 ½—at 1 ¼ percent, which means half of 2 ½ percent, it takes about 60 years to double, two generations, so that the prospects for intergenerational—for children to have higher standards of living than their parents have not disappeared, but there will be many more people who do not have higher levels of income than their parents if that is—if that situation persists.

So what caused that? There have been a number of explanations offered for the decline in productivity growth. Many people favor the view that it’s mis-measured. How can it be with everybody running around, having a computer in their pocket that productivity growth is down? Capital investment is low. That’s another factor. There is a well-documented falloff in business dynamism, in the rate in which new companies are founded and the rate in which—of which small companies are founded.

And Bob Gordon and others have argued that there’s simply been a decline in the rate of innovation, in the rate of discovery, not of—not necessarily of the most sophisticated products but of the sort of products or the sort of inventions that will lead to significant employment.

Well, what is it? Reality likely reflects a combination of all these factors and no doubt other things.

We also need to consider the possibility that weak demand has played a role in holding back productivity growth, although standard economic textbooks generally start with productivity and say that affects demand rather than vice versa. Chair Yellen recently spoke on the influence of demand on aggregate supply. In her speech, she reviewed a body of literature that suggests that demand conditions can have persistent effects on supply. In most of that literature, these effects are thought to occur through hysteresis in labor markets. Hysteresis is a short-term phenomenon that has long-term consequences. In most of that literature, these effects are thought to occur through channels in which—sorry—through channels in which something happens: People drop out of the labor force, they’re out of the labor force for a very long time.

But when one thinks about this link between current aggregate demand and future growth, there are likely also some channels through which low aggregate demand could affect productivity, perhaps by lowering research-and-development spending or decreasing the pace of firm formation and innovation. And I believe that the relationship between productivity growth and the strength of aggregate demand strength—of which aggregate demand is increasing—is an area where further research is required.

Needless to say, as soon as one writes a sentence like that, you discovery three articles which have already taken this up. And if you go to the website after this meeting, you will find there are references to a very good article on this topic.

Let me conclude by reiterating one aspect of the low interest rate and low productivity growth problems that I have mentioned previously, the fact that for several years the Fed has been close to being the only game in town, as Mohamed El-Erian and others have described it. But macroeconomic policy does not have to be confined to monetary policy. It’s the only game in town because the other guys didn’t want to play. (Laughter.)

Certain fiscal policies, particularly those that increase productivity, can increase the potential of the economy and help confront some of our longer-term economic challenges. While there’s disagreement about what the most effective policies would be, some combination of improved infrastructure, better education—that’s a longer-term impact—more encouragement for private investment, and more effective regulation all likely have a role to play in promoting faster growth of productivity and faster growth of living standards. And by raising equilibrium interest rates, such policies would also reduce the probability that the economy and the Federal Reserve will have to contend more than is necessary with the effective lower bound—zero, slightly below—on interest rates. It would make more room for countercyclical interest-rate policy.

Thank you. (Applause.)

ALTMAN: Stan, I’d like to start with two or three questions on the very last point you made. There’s now—there now is the prospect of a substantial fiscal stimulus here in the United States with the president-elect calling for both a large infrastructure investment program and for large tax cuts and the low likelihood that these would be fully paid for.

So first question is, how do you interpret the pretty major changes in asset prices over the past 12 days? We’ve seen yields substantially up: I think on the 10-year, 35 basis points as of Friday over the level that prevailed just before the election result. We’ve seen stock prices up, and we’ve seen substantial currency movements. How do you interpret those?

FISCHER: Well, first of all, 40 basis points is a lot, but it’s not that unusual. We’re now back roughly to where we were a year ago in long-term interest rates, and that was low. So there’s been an improvement, but we still have low long-term interest rates and low short-term interest rates.

In terms of interpreting that, there’s obviously enormous uncertainty about what’s going to happen with those plans that you described. But I think there may be two things there, one which is very promising I talked about at the end. I think there is a need for infrastructure investment as a way of increasing the productivity in the United States economy. And it’s difficult to design those programs, the tax treatment—tax and other treatment of infrastructure programs. And then reductions in interest rates on income would increase spending.

Now, there’s a concern, a justified concern, which has been emphasized by Marty Feldstein and quite a few others who’ve taken a serious look at the fiscal situation, that—we’re at very close to full employment if we’re not there already—that we don’t have a lot of room to increase the deficit without adverse consequences down the road.

So I think the answer is fiscal measures which increase growth over a sustained period would be terrific. Others would have a short-term benefit and would then require further action down the road as the economy really hits full employment.

ALTMAN: Well, let me ask you about this last point you made on the labor market, U.S. labor market. How much slack as you see it does remain in the labor market? After all, U-6 is still in the mid-9s. You have, I think, 11 percent of men in the 25-to-55-year-old range who are not in the workforce. So tell me your view on the—on the slack, or lack of it.

FISCHER: Well, you can make calculations of what you think the full employment rate of unemployment is, and it looks like it’s a couple of percentage points, possibly, below the 4.9 (percent) where it is now. But it isn’t a huge distance below, because what you’re talking about are separate phenomena which are of some importance, but the big numbers are in the group that is now with an unemployment rate of about 5 percent or a little—a little below that.

So I think the argument that is made—that has been made by Janet Yellen and others in the Fed, that there is some room for absorbing more of the unemployed into the labor force, is valid. And just to be sure that people understand the uncertainty about this, I think we were as surprised by the fact that the participation rate stopped falling, and so that the labor force as increasing but the unemployment rate wasn’t going down. That was because more people were looking for work. We hadn’t quite expected that phenomenon, and there may be other things out there. People now see that, if they go into the labor force, they can get a job. And that could have some further impact.

ALTMAN: One more question, on the asset-price reaction to our election. The dollar’s been very strong. I think I saw that, against, the Bloomberg Index, it had hit a 12-year high on Friday or Thursday. Tell me for a second what you think the impacts of that are globally. And are you concerned about it?

FISCHER: Well, there has been some appreciation of the dollar. Most of our—not most—large amounts of our trade are with two countries that aren’t big in global indices of exchange rates, namely Canada and Mexico. We trade with them much more than the rest of the world trades with them. And if we use a trade-weighted index, we’re putting a lot of weight on those two exchange rates; and Mexico in particular has had a significant devaluation recently.

But, having said all that, depreciation will tend to have a negative impact on exports. But we tend to make our decisions on the basis of what the law says we have to: what’s happening to inflation in the United States economy and what’s happening to employment in the United States economy. To the extent that exchange-rate changes affect employment, we’ll take them into account. To the affect that that effect is potentially quite important but not the only thing that happens—namely, people get employed in the domestic economy—it won’t stop us doing what we should do on the basis of inflation and unemployment in the domestic economy.

ALTMAN: Then, Stan, global growth. Global growth forecasts keep being marked down, and I think the most recent IMF forecast for global growth is just above 3 percent. And trade has been particularly weak. I mean, we saw—we’ve seen so many years where global trade growth exceeded growth itself, and now we might see—be entering into a period where the reverse is occurring. Why do you think global growth is so weak? And why do you think trade is so weak?

FISCHER: Well, the—global growth is so weak because aggregate demand in the global economy doesn’t—hasn’t picked up very much almost anywhere. And the former big engine of growth, which was the Chinese economy, is now a medium-sized engine of growth in the sense that its rate of growth of that economy is down.

In terms of why trade is less, there are changes in the model of trade. There was a lot of trade going on in Asia which involved a regional distribution of production, so things that came out of China had been worked on in a lot of other countries en route. And that model of trade is declining in importance.

The other thing is I always used to wonder, does it matter to have a big China or a rapidly growing China if you had to choose between them? And it was better to have a big—a rapidly growing China. And the reason that the rapidly growing China was important was a demand for raw materials for their investment program was a very big factor in their imports, and that’s fallen off quite a bit lately. So that’s another factor.

But for people who’ve argued for a long time that the way to grow is to integrate into the global economy, these results are cause for thought.

ALTMAN: Let me change the subject for a second. The president-elect has called for a sharp rollback of the financial re-regulation which was put into place after 2008, a rollback of Dodd-Frank in particular. The Fed is the most senior of the financial regulators. What’s your reaction to that idea?

FISCHER: We had a huge financial crisis. If this financial crisis had happened without the then-leadership of the Fed, it could have been very, very much worse. And many of us feared—perhaps we were exaggerating, but feared that what we were seeing in—at the end of 2008 was the beginning of a second Great Depression. It didn’t happen because of the very different treatment that the—very different policies that the Fed followed than had been followed in the 1930s by the central—by the central bank.

And that was caused by a financial collapse by bad behavior or bad strategy in the financial sector. We can’t allow ourselves to forget that. It’s amazing to me that eight, nine years after it we seem to have forgotten it. You speak to people in the financial sector, it’s as if nothing happened. But something happened, and something caused enormous distress. And furthermore, my sense is that a lot of subsequent events have been seriously affected by that financial crisis globally. And if we don’t fix that to the extent we can, I don’t think anybody will ever know whether we’ve dealt with the too-big-to-fail problem because we don’t know what the future will throw at us.

But we’ve certainly increased capital in the banking system significantly. We don’t want to—we don’t want to give up on that. We’ve certainly changed behavior in the derivatives markets. People don’t like it, but we don’t want to give up on that. And you can go through a set of measures on liquidity, on capital, on risk-taking that have changed the behavior of the financial system, and we’d better preserve that because if we don’t we are inviting further troubles emanating from the financial sector.

ALTMAN: One final question from me. In recent years, the Fed, at least it seems to me, is increasingly turning into the political equivalent of a piñata. (Laughter.) If you’re unhappy, bash the Fed. And now we have a president-elect who has been an avowed critic of the Fed, and to a lesser extent we have a British prime minister who also has been critical of her central bank. And a lot of people expect that the process of appointments—Federal Reserve Board governors, for example—is going to be increasingly politicized going forward, and that may also happen in England. Give me your reaction to that risk.

FISCHER: Well, I don’t know whether it’ll be increasingly politicized or less politicized. Just have no idea on how that’ll be handled.

But the one thing that is absolutely clear to me is the importance of the independence of the central bank. There are many reasons for that. Basically, it’s keeping a very attractive policy instrument for manipulating the trade cycle out of political hands. And the Fed is given a—given a task—it’s defined in law; it’s to maintain low inflation and it’s to maximize employment—that we have carry out, and we do it, and we’ve done it through this crisis. And I wasn’t there most of the time, so I can say objectively the Fed did it and maintained—prevented us getting anywhere close to unemployment levels of the 1930s.

Now, there’s one other factor which people don’t mention which I think is no less important than keeping political decisions out of it. There is one economic—(audio break)—several, but the most important, as you said, is the Fed—that has a well-defined task and that continues to operate independent of the political cycle. When the country closes down policies because the elections are coming, the Fed meets every six or eight—every six or seven weeks, gets on with what it’s supposed to do, does it.

There is one system that stays in place and that takes responsibility for using its tools as best it can to keep the economy on an even keel. I think that is extremely important at a time when political—when politics is disturbed, when there’s a lot of disagreement about what should be done, there is one side of policy, a very important side of policy, that is safeguarded from the disturbances that would otherwise happen.

ALTMAN: Let’s have questions please. I would just remind everyone that we only have one speaker here today, and that’s Stan—(laughter)—but please.

Yes, sir.

Q: Thank you. Juan Ocampo with Trajectory Asset Management.

Stan, thanks for coming and speaking to us. My question is about investment and the role of the corporate hurdle rate in that investment. I don’t think that the kind of ROE targets that corporates have been publicly setting for themselves has changed much since before the financial crisis. They definitely have not come down the way you’d expect, given the drop in long-term rates. And if they do what they say they’re going to do, they’re going to invest less because they have an artificially high hurdle rate, which is going to reduce productivity. And if you do that for half a dozen years, you are going to have lower growth at the end of it as well. So it seems to put a lot of these pieces together. Is this right? And, if so, why is it happening? And is there something that one can do about it?

FISCHER: That’s not an area in which I have much expertise, but it is clear. I mean, I was struck particularly with banks, which I do know something about, their rates of return, how the banks didn’t bring their hurdle rates down very much. They are lower than they were. So there’s been some impact, but it’s not as big as the decline in the short rate. But in any case, they should be looking at long rates, and those have declined less than the short rates.

Well, firms make those decisions on the basis of their estimates of risk. And they may have thought that risk is more important than those who are in policy areas think. But it would be useful—I used to, when I was in the role of a bank supervisor in Israel, I used to tell banks that I really didn’t understand why their target rates of return should be the same as those of hedge funds. (Laughter.) And—but they didn’t change very much, despite that.

ALTMAN: I should have said, in opening up the questions, please identify yourself when you ask.

Please, yes, sir.

Q: Hi. John Levin. Always a privilege, Governor Fischer, to hear your remarks.

Following the previous question, your remarks, your extensive writing on productivity, since productive capital investment is made by the largest corporations, do you think activism plays a role since corporations are trying to keep their earnings up, their cash flow up, and either join with the attackers or defend themselves from the attackers? It just seems to me activism is a factor in the decline of productivity.

FISCHER: Yeah, well, you’re taking me beyond areas that I’ve studied. So I’ll read up on that and be ready to answer it next time I come.


Q: Stan, my name is Hariharan.

Advices to the new incoming administration would suggest that the balance-sheet management of the Fed going forward probably is going to be very different to what has happened in your regime. In other words, there’s some suggestion that there should be a more aggressive winding down of the balance sheet. What do you think that could do to term structure of interest rates?

FISCHER: Well, I mean, it’s sort of obvious. Whatever happens when you increase supply of particular assets will happen to the term structure of interest rates. But the—we have announced what our policy is. And our policy is, as the interest rate approaches—the short-term interest rate approaches more normal levels, we’ll begin the process of winding down the size of our portfolio. But we’ll continue to roll over treasury securities, and we’ll start with reducing mortgage-backed securities.

So that’s there, and I haven’t heard anything that suggests we ought to change that approach. And that’s, I think, what we will do.

ALTMAN: Yes, ma’am.

Q: Good morning. My name is Nili Gilbert from Matarin Capital Management. I’d like to add my thanks to you for joining us here today.

It really feels, since November 8th, that conversations about inflation have changed dramatically. And when I listen to your comments about inflation, it feels—some of them feel like November 7th comments. For years inflation expectations have been very low. Global central banks have made a lot of cash available, but it has sat, much of it, on bank balance sheet, corporate balance sheets. The velocity of money has been low. Animal spirits have been low.

How do you see the risk of inflation expectations potentially becoming unanchored and of inflation rising at a pace that would be uncomfortable for you and your colleagues?

FISCHER: Well, I mean, no central banker will ever say, oh, I don’t worry about that stuff. (Laughter.) That’s what we get paid to deal with in part. I mean, there’s also the employment side of it.

The markets react to what they expect to happen. And sometimes they give more weight to expectations possibly than they should. I don’t know if that’s the case now. But we will take expected inflation into account, not because we worry about expected inflation per se but because expected inflation has an impact on actual inflation. And that’s what we will do with it.

I think anybody who’s studied the chair of the Fed’s voting record on inflation issues and things she said way back in the ’90s will know that the Fed, to the extent that the chair affects its decisions, which she does, that the chair and the rest of the board is going to stay—and the rest of the FOMC—is going to stay focused on the inflation issue as well.

ALTMAN: Yes, ma’am.

Q: Bhakti Mirchandani. I work at One William Street. Thank you for your comments and also for your longstanding support of microfinance.

We talked a little bit about, earlier in this discussion, rolling back Dodd-Frank. What’s your take on the Minneapolis plan to end too big to fail, the four-pronged plan? What’s your evaluation of it?

ALTMAN: I should have asked that one. (Laughter.)

FISCHER: You know, it’s—we—I think at various stages some people have said in the Fed, you don’t like regulations? Just take your capital ratio up to 50 percent and there will be fewer regulations. (Laughter.) Well, this is some way down that road.

ALTMAN: Yes, sir.

Q: Andrew Gundlach, First Eagle Investment Management. Good morning.

The largest or one of the largest buyers of U.S. government bonds was called on the campaign trail a currency manipulator. I’m just curious what your worries are about trade wars spinning into the pricing of money and long-term interest rates.

FISCHER: They’re a phenomenon that you have to know have happened historically and that you need to worry about. And you’re also allowed to hope that, when push comes to shove, people will realize the dangers of trade wars.

ALTMAN: Let me ask, myself, another question, Stan. Until the Fed balance sheet returns to something remotely resembling pre-2008 levels, QE—the experiment in QE won’t be really over, but what lessons do you think we can draw now in terms of the efficacy of the QE experiment, at least as it was conducted in this country? Do you think it worked? Do you think it was effective?

FISCHER: I think it was effective. There’s a lot of empirical to that effect, suggesting that that’s what happened. There have been concerns about whether the effect wears off over the course of time, and there’s some work going on on that now with some suggestions that the impact is less the longer these things stay in place. That’s a general feature of policies, that people figure out ways to get around them or exploit them or whatever.

So I think that we now know that what we had sought would be possible, namely that if there was a really serious crisis, the central bank or others could step in and try to stabilize interest rates, stabilize the financial markets by purchasing assets appears to have worked. We’d rather not be there. We’ve made that clear. But if you are there, these tools will do part of the job if not the whole job that the interest rate does in normal circumstances.

ALTMAN: One last one. When I served in government both times, most of the statements that came from the Fed board came from the chairman. (Laughter.) And—

FISCHER: Can’t imagine what’s coming next. (Laughter.)

ALTMAN: And now we have a dynamic where, you know, regional Fed presidents, other governors are giving speeches all the time, left and right. Lot of people in the markets think that’s confusing.

What’s your reaction to the before and now the after?

FISCHER: Well, I sort of know the after, but I wasn’t that fully informed on the before.

ALTMAN: Well, there were chairmen like Burns and like Greenspan, who—let’s say looked dimly upon adventurism on the part of the other governors. (Laughter.)

FISCHER: Well, before you get into trouble, you might mention somebody who appeared between Burns and Greenspan. (Laughter.) Yeah, you know, the general approach is the markets need to know everything so they can form their opinions accurately and that more transparency is better than less. And as time went by, the Fed moved away from a single-spokesman model.

It is confusing when different governors say—different members of the FOMC or actually participants in the FOMC meetings, because several of those who speak frequently don’t have the vote most of the time. And I believe there are a lot of messages coming out. But it’s very difficult. We’ve now got far more media. They all need to say something. So the demand is there for speeches, and supply is there because each board of each regional fed wants to be—wants its name to be in the newspaper. And how do they get their names in the newspaper? They give a speech.

So I think we’re in a new equilibrium—(laughter)—and I’m not sure how we’re going to get back to something that’s more convenient for people who—

ALTMAN: Well, there was a person who had held the same position you currently hold quite a few years ago, who happens to be a friend of mine. And he went out and gave a speech, which displeased the chairman. And there was some fallout.

And I asked him a little bit after that speech, not long after, what happened. He said: I returned to the office, and I found that my staff had been redeployed. (Laughter.)

FISCHER: Roger, is this a true story?

ALTMAN: Yes, it is. Yes, it is, at least according to the individual who told me, who was the miscreant in this case.

But are there any further questions? (Laughter.) Yes, ma’am.

Q: Hi, Stan. Rachel Robbins.

FISCHER: Oh, hey.

Q: Stan, you talked about among the factors that could increase productivity incentives for private sector investment. Could you talk a little more about that? And in particular, do you see anything that could help that vast swath of Rust Belt people who are losing manufacturing jobs and will continue to do so with automation?

FISCHER: I haven’t seen anything particularly aimed at the Rust Belt so far. I think these ideas are sort of being discussed. People who know about productivity programs in which the government has a significant role say they’re very difficult to work in the current political—not in the current—in the structure of the political system, not because of who’s sitting in the political system at the moment or will be sitting there in the near future.

So I don’t—I don’t know what could be done there. And you know, the economy moves on, and you can’t—you’ve got to find ways of permitting change and helping people who would be hurt by the changes. But you can’t do it by preserving the structure that existed previously. The world is a very different place than it would have been 20 years ago. And we’ve got to find ways of helping those who would be hurt by what it is that is needed in the new modern and ever-changing economy.

ALTMAN: Yes, please.

Q: Benn Steil from the Council on Foreign Relations.

Stan, the zero lower-bound problem, which you referred to earlier, has been addressed in—by central banks around the world in a number of ways: negative interest rates, asset purchases. The Bank of Japan, as you know, recently moved toward a zero-yield target for 10-year JGBs, Japanese sovereign bonds.

To the extent that low long-term yields actually reflect pessimism in the market about future economic prospects, are such policies targeting low long-term yields problematic in certain circumstances? And how does a central bank deal with that?

FISCHER: Well, I think you have that problem throughout, Benn. If you—we’re—we are—would be happier if the short-term interest rate was higher. Same problem. The higher interest rate will discourage some investment. We want it to be higher because partly it’s a sign of confidence about the future. Partly it’s a reflection on what would—what room we would have to move if there were a crisis again.

So with the long rates, you have to decide whether the incentive effect is greater than the signaling effect. And my guess is that if you or—if you run good policies and if the economy has confidence in what you’re saying, that having low long rates could be encouraging for longer-term investments and that you can’t say, well, we want a higher rate for that because it sends a signal of confidence.

By the way, I think what the Japanese are doing is just a sophisticated form of operation twist, where they’ve actually put numbers onto spots in the term structure and doing a policy which has been—which we did actually already and which had been done 40 or 50 years ago as well.

ALTMAN: Yes, sir.

Q: Arthur Rubin with SMBC Nikko.

The last two weeks has not been kind to emerging markets. You alluded to this sharp drop in the peso in your—in your comments. And the prevailing wisdom right now seems to be that in a higher-rate environment globally, that you’ll continue to see pressure on emerging markets in Latin America.

Do you think that the market has overdone its initial selloff? And what’s your medium-term prognosis for emerging markets?

FISCHER: Well, I’m not going to give you market commentary. If my wife were here, she’d say he always gets it wrong anyway, so. (Laughter.)

But remember what happened with the taper tantrum. First, they were very upset about our raising or wanting to raise rates. And then, when we wanted to reduce rates, they were also very upset. And in terms of what people—central bankers from other countries have told me, a lot of them wanted to—wanted us to raise the rate sooner rather than later, and they have their own reasons—some of them related to the interest rate—to want that to happen. So the adjustment—the immediate adjustment is a bit awkward, but the longer-term situation they get into is one that many of them would prefer to be in.

ALTMAN: Yes, sir.

Q: Hi. Mike McDonough from Bloomberg.

I had a quick question: How concerned are you of the rising—(audio break)?

FISCHER: Well, I mean, you know, you expect those rates to go up, they’re still—along with other rates—and they’re still low. And there are quite good reasons to expect the housing—there are good signs of what’s happening in the housing sector as well as rising—in addition to rising interest rates operating in the other direction, namely prices. So we—the housing sector is important. It’s not as massive as it used to be, and so there are other parts of the economy we have to think of as well.

ALTMAN: Yes, sir.

Q: Herbert Levin.

From the standpoint of the Fed, are your counterparts in the Chinese banking system handling their rates responsibly, or are they a problem for you? (Laughter.)

FISCHER: We don’t comment on how other central banks are doing things, and I say that in a totally neutral sense. I don’t—I mean, I don’t want to comment.

I’m impressed generally by how the Chinese managed for over 40 years to basically keep their economy growing at 10 percent. I’m also quite impressed by people who think that 6 ½ percent is kind of a come-down; 6 ½ percent looks pretty good to me. (Laughter.) But, you know, it’s a very complex situation.

And I will confess to something which probably I shouldn’t say, but you know, the day after the Chinese let the exchange rate go, I kept hearing statements about, well, they certainly didn’t handle that very well, and their announcements weren’t persuasive, and they didn’t seem to know exactly what they were doing. And I kind of thought about September the 15th, 2008, and wondered about just what a fine, coherent message anybody would send in a situation like that. So you have to give them a little room to be human.

And beside that, I don’t get into the details.

ALTMAN: I might have been guilty myself of such rash and intemperate statements. (Laughter.)

Yes, sir.

Q: Thomas Costerg with StanChart.

If we look back at what you did at the Fed, can you maybe tell us what is your biggest achievement that you’re most proud of, and also what’s your biggest regret? Thank you.

FISCHER: Are you talking about the Fed, or me? (Laughter.) Me. Yeah, well, I don’t answer those questions. (Laughter.)

ALTMAN: Yes, sir.

Q: Mai (ph) Gugarats with Argus Media.

In February, you talked about the price of oil becoming a macroeconomic issue. Do you think it still is?

FISCHER: Oh yeah, it still is. If it moves—if it moves a lot, we’ll realize again that it’s a macro issue.

ALTMAN: Yes, sir.

Q: Barry Zubrow, Council member.

Going back to the discussion of different presidents of Reserve banks making speeches and comments, and looking forward or not forward to a debate in Congress about perhaps other structural reforms for the Fed or oversight, I wonder if you could comment about how, based on your experiences, you would think about—with a clean sheet of paper, would you design the Federal Reserve System the way it is today, with the Board of Governors and individual Reserve banks? Or would you think of a more comprehensive, unified system?

FISCHER: Well, that’s a very hard question to answer because we’re not going to have a clean sheet of paper.

But the—I think that it is important that there is regional representation. And I find the meetings of the FOMC, where almost every president of a regional bank starts by describing conditions in their region or in their district, I find those very useful, actually. Sort of I’m a believer in using numbers and running regressions and all that. I also learn a lot from the way people talk about things. And I’m sort of stuck in my own way of thinking about the fact that one good example is worth several thousand theorems.

Where did I really learn that it’s good to have an open economy? It was when I first visited Argentina in 1984 or thereabouts and saw everybody driving 1960 Ford Falcons. Why? Because they had the monopoly. And you sort of pick up those little facts all over the—all over the—all over the place.

So we hear a lot from the presidents, and that’s very, very useful. So I think you’d need a system in which the regions have some standing, and are slightly different than the Board in Washington. But I think because this is such an important function from the viewpoint of the economy, and its impacts are political, that there has to be a governmental—governmentally appointed body in the middle or at the center of the system, as there is now.

You know, then you can get into all the details. Should these people be—should the presidents of the regional—of the regional banks be appointed by the president? Et cetera. Well, it sounds like the right thing to say. Confirmed by the Senate, we’d have about—quite a few positions empty much of—much of the time. I mean, it’s just a different process. And if the job is less important, you don’t have to escalate all the time who gets to appoint people.

But I don’t have any thought that this is going to change very much. I mean, obviously, if we were doing this in the year—had been doing it in the year 2013 instead of 1913, the central—the regional banks would be in different cities. That much is for sure. Try and undo where they are? Good luck. (Laughter.)

ALTMAN: One final question. Yes, ma’am.

Q: I’m Amy Wilkinson. I teach at Stanford Business School, after spending the last 10 years in the East.

And so my question is about how you think of regional economic differences. And specifically, after this election, there’s quite a lot of conversation in California about a Calexit, being the sixth-largest economy in California.

ALTMAN: I’m sure Stan’s going to support that one. (Laughter.)

FISCHER: Well, I have to say we have two sons living in California, and when we came back to the States in 2013 it was partly because we wanted to be in the same country as our children. So I’m against. (Laughter.)

ALTMAN: Let’s please thank Stan. (Applause.) Thank you all.

FISCHER: Thanks, Roger.


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