Stanley Fischer on U.S. Monetary Policy

Monday, February 1, 2016
Stanley Fischer

Vice Chairman, Board of Governors of the Federal Reserve

Tom Keene

Editor-at-Large, Bloomberg News

Stanley Fischer, vice chairman of the Federal Reserve’s Board of Governors, joins Blooomberg News’ Tom Keene to discuss recent developments in U.S. markets and monetary policy. By focusing on long-term trends, Fischer emphasizes the “accommodative” nature of the Federal Reserve’s latest decisions.

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.

KEENE: Good afternoon. Because of time and an important statement by the vice chairman, I’m going to be very quick, abrupt, no discussion of his immense accomplishments. I’m going to assume so many of you know that.

I need to welcome you to today’s Council on Foreign Relations meeting. It is part of the C. Peter McColough Series on International Economics. I don’t know, Vice Chairman, if you can talk about international economics here today. We’ll get to that.

I’d also like, of course, to welcome all CFR members around the nation and the world participating in this meeting through the livestream. And of course, I should state here, as I will a number of times, this is an on-the-record meeting today.

Without further ado, the vice chairman with his statement. (Applause.)

FISCHER: Well, thanks very much, Tom. And thanks very much to the Council on Foreign Relations for inviting me to take part. I wasn’t quite sure when I was—I wasn’t sure when I was invited that it was going to be this day relative to what’s going on outside, but here we are. And to get things started, I thought I’d provide some background on recent monetary policy decisions.

I should mention before continuing that my comments today reflect my own views, and are not an official position of the Board of Governors or the Federal Open Market Committee.

As you all know, at our December meeting my colleagues and I on the Federal Open Market Committee, the FOMC, decided to raise the target range for the federal funds rate by a ¼ percentage point, to ¼ to ½ percent. This increase came after seven years during which we kept the federal funds rate at what we call the ELB, the effective lower bound, which was somewhere between zero and ¼ percent. This ultra-low rate was in keeping with our congressional mandate, which is to pursue a monetary policy that fosters maximum employment and price stability, which we define as 2 percent inflation. Our decision in December was based on the substantial improvement in the labor market and the Committee’s confidence that inflation would return to our 2 percent goal over the medium term.

Employment growth last year averaged a solid 220,000 per month. The unemployment rate declined from 5.6 percent to 5.0 percent over the course of 2015. Inflation ran well below our target last year, held down by the transitory effects of declines in crude oil prices, and also in the prices of non-oil imports. Prices for these goods have fallen further and for longer than expected. Once these oil and import prices stop falling and level out, their effects on inflation will dissipate—which is why we expect that inflation will rise to 2 percent over the medium term, supported by a further strengthening in labor market conditions.

I would note that our monetary policy remains accommodative after the small increase in the federal funds rate adopted in December. And my colleagues and I anticipate that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, and that the federal funds rate is likely to remain for some time below the levels that we expect to prevail in the longer run.

Given the large size of the Fed’s balance sheet, the FOMC is employing new tools to implement monetary policy. In particular, to raise the federal funds rate we increased the interest rate we pay on reserve balances that depository institutions hold at the Federal Reserve. We also employed an overnight reverse repo facility—reverse repurchase facility—through which we interact with a broad range of firms to help provide a soft floor for the federal funds rate consistent with our target range. These new tools have worked well, and the federal funds rate and other short-term interest rates have increased, as expected, to the range between ¼ percent and ½ percent. We will continue to monitor financial market developments closely, and we can make adjustments to our tools if needed to maintain control over money market rates.

At our meeting last week, we left our target for the federal funds rate unchanged. Economic data over the intermeeting period suggested that improvement in labor market conditions continued even as economic growth slowed late last year. But further declines in oil prices and increases in the value of the dollar—foreign exchange value of the dollar suggested that inflation would likely remain low for somewhat longer than had been previously expected before moving back to 2 percent. In addition, increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we’ve seen similar periods of volatility in recent years that have left little permanent imprint on the economy. As the FOMC said in its statement last week, we are closely monitoring global economic and financial developments, and assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

Now, I expect that in a few minutes one of you will ask not about what we did at our last meeting, but rather what we’re going to do at the next—(laughter)—at the next meeting. I can’t answer that question because, as I’ve emphasized in the past, we simply do not know. The world is an uncertain place, and all monetary policymakers can really be sure of is that what will happen is often different from what we currently expect. That is why the Committee has repeatedly indicated that its policy decisions will be data-dependent—that is, we will adjust policy appropriately, in light of economic and financial events, to best foster conditions consistent with the attainment of our employment and inflation objectives.

As you know, in making our policy decisions, my FOMC colleagues and I spend considerable time assessing the incoming economic and financial information and its implications for the economic outlook. But we also must consider some other issues, two of which I will mention briefly today.

First, should we be concerned about the possibility of the unemployment rate falling somewhat below its longer-run normal level, as the most recent FOMC projections suggest? In my view, a modest overshoot of this sort would be appropriate in current circumstances for two reasons. First, other measures of labor market conditions—such as the fraction of workers with part-time employment who would prefer to work full-time and the number of people out of the labor force who would like to work—indicate that more slack may remain in labor market than the unemployment rate alone would suggest. And second, with inflation currently well below 2 percent, a modest overshoot actually could be helpful in moving inflation back to 2 percent more rapidly. Nonetheless, a persistent large overshoot of our employment mandate would risk an undesirable rise in inflation that might require a relatively abrupt policy tightening, which could inadvertently push the economy into recession. Monetary policy should aim to avoid such risks and to keep the expansion on a sustainable track.

In this context, I’d point out that at our January meeting we reaffirmed our statement on longer-run goals and monetary policy strategy, with an adjustment to clarify that our inflation goal is symmetric. That is, the Committee would be concerned if inflation were running persistently above or below our objective. In my view, even if inflation was expected to return to 2 percent over time, persistent deviations from our goal in either direction could cause economic harm and could ultimately unmoor longer-term inflation expectations. Of course, whether the Committee would take action to address a persistent deviation from its inflation objective would depend on the circumstances, and in particular on the outlook for employment and inflation, and an assessment of the likely lags in the effects of monetary policy.

My second topic is how best to integrate balance sheet policy with interest rate policy. The Committee has indicated that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively. But that statement leaves open the question of when we should begin to reduce the size of our balance sheet. Because the tools I mentioned earlier—the payment of interest on reserve balances and the overnight reverse repurchase facility—can be—can be used to raise the federal funds rate independent of the size of the balance sheet. We have the flexibility to adjust the size of our balance sheet at the appropriate time.

With the federal funds rate still quite low and expected to rise only gradually, there is some benefit to maintaining a larger balance sheet for a time. Doing so should help support accommodative financial conditions, and so reduce the downside risks to the economic outlook in the event of a future adverse shock to the economy. Consistent with this view, the Committee has decided to continue to reinvest principal payments from our securities portfolio until normalization of the federal funds rate is well underway. The decision about when to cease or begin phasing out reinvestment will depend on how economic and financial conditions and the economic outlook evolve.

Well, thank you. I’d be happy to respond to some questions, starting, I believe, with those from our moderator today, Tom Keene. (Applause.)

KEENE: Thank you. I’ll let someone else in the audience ask what you’re going to do at the next meeting. (Laughter.)

This is such a great pleasure. And on behalf of all my colleagues, it’s wonderful to be here. I could think of eight ways you could have canceled this meeting today with grace and dignity. There’s so much going on.

FISCHER: You should have told me that before, Tom. (Laughter.)

KEENE: There’s just so much going on, and we’ll try to get to it all, with respect for your public service.

Ultra-accommodative; as you mentioned, we’re now accommodative. We’re migrating in some direction. Michael Feroli here, with JPMorgan, and this idea of a terminal veil, a place we’re heading to, the vector of where we want to go is maybe to a new, lower level—the dots come down, potential GDP comes down, we play with NAIRU. We’re trying to get out somewhere. Is it a new out somewhere for America? Are we moving to a more dampened American economy?

FISCHER: Well, I think we have to wait to see precisely where this process will take us. We expect now that the numbers given in the survey, we can now make projections, the SEP of members of the FOMC, of somewhere around 3 ¼, 3, 3 ½ percent, which is on average a bit lower than in the past. But we’ll be data-dependent and we’ll see what happens. We don’t have to fix a rate that we’ll be at. We can indicate what members of the FOMC believe, which is what the number I’ve just given you is.

KEENE: Within the debate that you have at the Federal Open Market Committee, there’s such a separation now between our service sector and our goods-producing sector. What have you learned about our manufacturing economy in the recent quarters, as many are concerned of a recession in manufacturing?

FISCHER: Well, manufacturing growth has declined, and we’ll have to, again, wait and see what develops. But we are in a process—the American economy is in a very long-run process of manufacturing declining as a share of GDP and services continuing to increase as a share of GDP, and so there’s been a tendency for manufacturing to grow less rapidly than GDP for some time.

KEENE: We are data-dependent. I’m not quite sure—is that phrase adorned with Fischer stars? No?

FISCHER: (Laughs.) Not as far as I remember, but—

KEENE: Data-dependent, or there’s actual progress. What does “actual progress” mean to you? When you attach Fischer academics over to Fischer policymaking and the advice you give Chair Yellen, what does “actual progress” actually mean?

FISCHER: Well, actual progress is if we are progressing towards meeting our goals, and our goals are defined by law and by the statement on our long-run goals that I mentioned earlier. And our view of progress is what the law calls maximum employment and what we call maximum sustainable employment, and a 2 percent inflation rate. And when we get there—we’re there—we’re very close to there on employment, and on inflation the core number that came out this morning was 1.4 percent. You know, that’s not 2 percent. It’s not in another universe. It’s not a negative number. But inflation’s been pretty stable, and we’d like it to go up.

KEENE: My colleague, Michael McKee, points out the idea, and course a classic phrase, is inflation no longer always everywhere—always and everywhere a monetary phenomenon? I mean, there’s an academics here, and then there’s lessons learned in the recent years. How has your treatment of inflation changed as we struggle with an oil shock, with these transitory elements, as you call them?

FISCHER: Well, we—you know, we dealt with the oil inflation of the 1970s and we didn’t day that was caused only by monetary policy, and so it’s been around for a long time and we have the same set of issues. There are relative price changes, such as the change in the price of oil, that have an impact on overall inflation, and that’s what we’re dealing with. That’s a large—a significant part of what we are dealing with at the present time. And the price of oil—somewhere below 30 (dollars), at least was recently—can or could continue to decline. I’m talking as an academic now; I’m not making a prediction.

KEENE: You can make a prediction if you’d like.

FISCHER: Thanks. (Laughter.)

The price of oil will stop declining at some point. We don’t have to have it rock—(laughter)—

KEENE: My job’s in jeopardy on radio—(laughs)—

FISCHER: Well, I’m forever quoting Herbert Stein, who I had the privilege of working with early in my career. And one of Herb’s many wise one-liners was, “If something can’t go on forever, it will stop.” (Laughter.) And as long as we are talking about the dollar price of oil, it can’t go on forever falling, so it will stop.

KEENE: It will clear markets. Do we—at some point oil will clear and we will move forward. Do you just assume inflation will revert, as you said, to a longer-run trend? Or are there permanent effects to this Great Recession, permanent effects to the unwinding of the debt that many presume?

FISCHER: There’s been a remarkable correlation, which is actually slightly hard to account for, between what’s happening to the price of oil and a variety of other financial variables. And it happens with equity. It happens with inflation expectations. And the connection is remarkably close, in a direction which you wouldn’t actually have thought of originally. That is, when the price of oil goes up, equity prices have been going up lately, not down. And somebody said to me recently, well, that’s because the market treats the price of oil as entirely a demand phenomenon, and it’s an index of what’s happening. It’s largely a supply phenomenon. And so precisely how the markets will digest this and when they’ll begin to interpret it differently we’ll have to watch and see.

KEENE: You mentioned in your comments today uncertainty. That takes me back to Skidelsky’s writings on Keynes, the idea of folding in uncertainty—or, as Larry Summers would say, the importance of confidence—into our monetary policymaking. Fold in for us right now where we are with our uncertainty and where we are with the lack of confidence.

FISCHER: Well, it’s comparatively recent. The uncertainty we’re dealing with now started basically at the turn of this year—the enhanced, the higher level of uncertainty. And we—since we raised the interest rate in the middle of December, we’ve had a very high labor—increase in employment in the data reported at the beginning of January. So when you look at the real side of the American economy, and I’m putting manufacturing somewhat on this side, you’ve got a labor market that’s been remarkably strong for a long time and has continued to be remarkably strong.

We’ve got different things going on abroad, but some probabilities of increases in economic activity in Europe and in India, at rates which once were thought of to be solely Chinese. So there are other things going on, and we have to wait and see to what extent the financial instability reflects something real or is about what you—what Keynes called “animal spirts.”

KEENE: With it—and I want to get to the international questions in a moment, and certainly the history that we saw on Friday from the Bank of Japan, but—and I know you’re not going to comment on specific banks, that’s part of the game. The parlor game is 4-3-2-1, and it’s this whole ballet of are we going to have four rate increases or that. I go back to Greenspan’s measured or the other phrases that are involved today. Take us inside the debate at the Fed of the how. How do you determine, through 2016, the when of those rate increases?

FISCHER: Well, we’ve been reasonably clear on that, I think. We have—let me first describe the SEP, the Survey of Economic Projections, of the 17 members of the Open Market Committee.

Every three months, we all fill out a survey, which asks a lot of questions about growth, about inflation, about interest rates. The question on interest rates is different than the others. The others are forecast; the interest rate forecasts—the interest rate projection is the answer to the question, what do you think the appropriate path of interest rates will be. And that’s different than what we say about output, and so forth. And there’s a range of views.

So on, for instance, 4-3-2-1 or whatever the numbers are that you specified, there was a range of views as well. And when somebody said in the ballpark, he meant it’s among the numbers that are being talked about. He did not mean it is the only number that is being talked about. And we don’t actually meet to discuss how many we’ll do in the coming year. There is some discussion. The language in the announcements is we believe it will be gradual, et cetera, et cetera. It’s not, well, we’re going to do it four times. We don’t have to do that—make that decision. We say we will be data—the results will depend on the development of the economy and it will be data-dependent. If we knew how often it was going to be done, we could get rid of this whole paraphernalia of eight meetings a year and do one a year and get the whole thing out of the way. We follow incoming information, and we make our decisions on that basis, not on the basis of a set of predetermined decisions.

So that is the process that takes place. And then we present the summary of those projections. But there were—there were—I can—I’m not allowed to talk about what individuals thought.

KEENE: Do I have you in a lot of trouble right now? (Laughter.)

FISCHER: Oh, I think you started from the beginning, Tom. (Laughter.) You know, there were people then who thought it would be a slow process. You’ve seen it quoted in the press. Everybody on the Committee’s allowed to say what he or she says or thinks. You’re not allowed to say what other people say or think. But you see, we’ve had enough people saying what they think for you to realize that there were some who were less—who thought there’d be fewer, and some who thought there’d be quite a few.

KEENE: Productivity is a mystery. If you go back to your work years ago, and the seminal work of Solow and Modigliani and others, productivity and this strange new things—and this is only a recent idea in my head—do we really have a gauge on technological progress now? Are you—Chair Yellen and others—are you flying blind to an extent because you can’t gauge or measure America’s technological progress, or mis-measure, almost?

FISCHER: Well, economists have a measure. It’s the part of growth they can’t account for by increases in—increases in capital input and labor input. And you use some production function and you come up with a number. That number has declined significantly. There are books written about it. Bob Gordon’s recent book has gotten a lot of attention. And Bob says the great inventions were all inventions of the 1940s. Modern inventions about which we’re very impressed—internet and all that—will not have anything like the impact on productivity that—

KEENE: Do you agree?

FISCHER: This is one where you cannot have a well-based judgment. And I think this is a case of whether you think of yourself as an optimist, or you are an optimist or a pessimist. I’m an optimist. And I believe that the things we’re looking at now will lead to enormous changes in the organization of economic activity in the United States and in the productivity of American workers.

KEENE: November 19th last year, Stanley Fischer: The basic question of whether the economic center of gravity of the world will continue its shift of recent decades toward Asia, in particular to China or perhaps to China and India, this shift would represent a return in some key respects to the global order of two centuries ago—I guess that’s the long term—of two centuries ago and earlier, before the economic rise of the West. We have a most interesting international economics now. We could speak of the oil economy. We could speak of Europe.

But we have the news of course, I believe it was on Friday, of negative interest rates with the Bank of Japan. I know it’s inappropriate to ask you about other banks and their action now, but to those of us in the room who know that negative rates isn’t in a Fischer textbook, it is new territory, comment on the experiment of negative interest rates as one part of five nations monetary toolbox.

FISCHER: And this is an idea which was discussed in the 1930s. And there were a variety of suggestions around about how to deal with the fact that because currency exists and have a zero interest rate in nominal terms—if you hold dollars in your pocket you’re not getting interest on that—it was assumed that you couldn’t go below zero. And then there was a whole discussion about how to do it. If you wanted to go below zero—and there was a famous—I don’t know if he’s European or Argentine—economist, Gesell, who said you should stamp the paper. Once a year, you have to bring it in to have it maintain its value. And its value goes down according to the stamp that’s one it, so that you can get a negative rate of return on currency. If that was there, then you could get negative rates of return on the whole economy. That was already a 1930s idea. And I’ve even seen pictures of some stamped currency. Whether they’re genuine, I don’t know.

So that idea has been around. And the problem is, that we believed that we could not get interest rates to go below zero. Well, it turns out that five European countries and—sorry, four European and one Asian country have now done that. And how can you do that when currency has a zero rate of return? You can do it because it turns out that holding currency is not so easy. If you’re going to keep your billion dollars in currency, you’re going to have to find a place to store it, you’re going to have for that, you’re going to have to insure it, and you’re going to have to have it guarded. And by the time that’s done, you’ve no longer—zero is no longer the lower bound. All those costs are the lower bound, and those costs seem to be significantly below zero in the sense that we have a Denmark and one other country having a negative 75 basis point interest rate, which worked.

Now, there’s a lot of details that I don’t want to go into about it. It didn’t work across the whole economy. They didn’t include the small depositors in their crowd who were not—who were getting negative interest rates. So that idea is there. And that’s what they’re pursing. And, you know, everybody is looking at how that—how that works. But you know, practical policy, you’ve got to do a heck of a lot of work.

KEENE: I spoke with Barry Eichengreen recently, of Berkeley, and we compared dollar strength to what we saw in the late ’90s, the so-called Rubin dollar. And he said—and these are his exact words—he sees elements of Plaza Accord dynamics, where we had a huge dollar as well. The instabilities—the set of instabilities that we have in January of 2016, are they instabilities that can lead to significant flows out of nations, whether it’s from negative interest rates or from other actions? Do you worry about flows of capital becoming more abrupt?

FISCHER: Well, that’s clearly a concern. It’s always a concern when markets are very volatile. But, you know, it’s part of the business. And we watch that. And we’ll deal with it.

KEENE: You mention in your comments this morning three times a thought of your esteemed colleague, Mr. Dornbusch, a modest overshoot. The overshoots are dangerous, aren’t they? That’s what gets you types into trouble, isn’t it? Those overshoots? (Laughter.)

FISCHER: I came close to saying that in what I said a few minutes ago. You don’t want to go too far, because you go too far you have to come back fairly quickly. And those—then it has a tendency—possibility of becoming unstable. So you know, small overshoots not a big problem. Big overshoots, yes.

KEENE: Are we in a time of big overshoots? I mean, if we move forward here with the shock that we saw on Friday, the abrupt weakening of the Japanese yen, are we near that kind of instability, or do you have a great confidence, as Willem Buiter does at Citigroup, that there’s a confidence in what we do in monetary policy?

FISCHER: Well, there is, of course, a confidence in what we do in monetary policy. And that’s why we have to consider what we do, and also not give rapid answers to new questions. We’re still thinking. (Laughter.) We’re still thinking about it.

KEENE: And on that note, we will move to our audience. There’s just so many people to turn to today. Dr. Feroli, I see you back there hiding. Would you like to go with our first question? I don’t want to get you in trouble with James Dimon, but I’d be honored, Michael Feroli, who has led so much of the debate on terminal value, would you have a question for the vice chairman?

Q: I guess I wonder if we’ve learned more about the costs of negative interest rates—

KEENE: Let’s get a microphone on Michael Feroli. Do we have a—

Q: Just what we’ve learned about the costs of negative interest rates relative to the last time the FOMC discussed this, and I think it was 2012.

FISCHER: Well, we clearly have—we have actual experience of countries that have used negative interest rates. And I haven’t done a careful evaluation. Countries that have used it continue to use it. They haven’t given it up. We even had the Danes undertaking a contractionary monetary policy that raised the interest rate from minus 75 basis points to minus 65 basis points, thereby raising the interest rate. So it’s working more than I can say that I expected in 2012, although I wasn’t on the Committee at that stage.

KEENE: Mr. Peterson, please.

Q: Thank you for that excellent presentation. I know, Stanley, as is usually the case, you said very little about the long term data outlook and the interest costs that go with it. And the feeling of some of us, that it’s not only unprecedented, but it’s unsustainable, and it’s very largely unaddressed. Tell me how concerned you are about the truly long-term debt interest cost situation, and what you think should be done about it, if anything?

FISCHER: The most recent CBO projections suggest that, you know, in about six or seven years interest costs will begin to rise in the—in the budget. And you can try everything, but when the debt keeps increasing, you have to stop—you have to take measures to top it. It’s that simple. But politically, it’s not that simple.

KEENE: Padma Desai, please. I should mention also, again, that we are on the record for this presentation with Vice Chairman Fischer and members. Let’s try to keep the observations and questions down to a contained amount to get as many people as we can. Please.

Q: Thank you. In view of the contentious politics in Congress over fiscal policy and the budgetary management, do you think that the entire burden of managing the economy during the recession phase has fallen on monetary policy and the Federal Reserve? Would you like to comment on that, because fiscal policy was all non-functioning, almost, changing?

FISCHER: The fiscal policymakers don’t meet every six weeks to decide what step they want to undertake next. They sort of watch the situation, and when things get too far from control they make changes. We’ve had changes. We had a very expansionary fiscal policy, 2009, 2010. There was—I used to say we have—the United States has had, looking at the data, a very responsible fiscal policy. Listening to the noise, you wouldn’t know that. You have to actually look at the data. But we sort of day-to-day—or, sorry—month-to-month, it was the Fed that was making the decisions. In the background were big fiscal policy decisions that affected what was going on.

KEENE: Within those fiscal policy—in conversation I have with everyone there’s this frustration over infrastructure. I don’t know if you dealt with that as governor of the Bank of Israel, or with your work over the years, but there’s this fiscal yearning that we’ll do something about our infrastructure. Is there a Fischer plan, like the Marshall Plan? (Laughter.)

FISCHER: Marshall came along with some money—(laughter)—for that particular—for that particular plan. Look, a lot of economists—and here I’m definitely speaking not for the committee but for myself, as I have been all along—a lot of economists believe that a responsibly financed infrastructure-based change in fiscal policy would both assist the increase in productivity growth that we’re all hoping to see, and contribute to fiscal—to strengthening the economy.

KEENE: Sir, right here.

Q: There are numbers of politicians—name is Steve Schwebel. Number of—

KEENE: Steve, could we have the microphone, please.

Q: Numbers of politicians have criticized not only certain activities of the Federal Reserve, but some even its very existence. Could you comment on that? (Laughter.)

KEENE: They’re doing that in Iowa today. (Laughter.)

FISCHER: I have the privilege of watching this global crisis, the one that started in 2008, unfold from a long distance. And I thought the Fed did a terrific job. I think the country owes a lot to the Fed. I had nothing to do with it, so I can say that. And saved—I believe the statement that the Fed saved the United States from a renewed Great Depression, and that’s not a small thing. So that’s how I see the situation. Now, there are others who believe either that there were better monetary policies that should have been followed. And probably there were, but possibly not in the direction that many of the critics have said. Or that we should go to some other mechanism.

Well, we’ve tried a lot of those mechanisms. We used to have a gold standard. It didn’t work. Then we decided that the money supply was everything. It didn’t work. And so it goes. And I believe that what the Fed is doing is fundamentally correct. And the way it’s set up, it’s an immensely complicated organization. It’s quasi; it’s half government and half private. The Federal Reserve Bank, the regional Federal Reserves are actually, in form, private, they’re not in practice private. But that’s the setup.

But clearly, that’s how it was set up in 1913. It survived a hundred years which is much longer than either of the first two central banks which the United States set up in the 19th century.

So one listens to the critics. I always believe you have to listen to your critics, frequently they have a point. In this case, I don’t see a major point about the way the Fed is doing things and why it might be doing it in the wrong direction. I don’t think that’s the case.

KEENE: How do you respond then to the critics, Vice Chairman Fischer, who simplistically say this is a Fed wedded to the Phillips curve within a broad sense of traditional economic modeling and that they either have to have a new attitude or no attitude as it is? How do you respond to that simplistic criticism?

FISCHER: Well, you know, the Phillips curve, the wage-to-inflation route has never been that tight. It’s around, and this is based on something very simple, which is that the tighter the labor market becomes, the more likely it is that wages are going to rise. That doesn’t seem to me to be a very sophisticated theory which is beyond the capacity of human beings to understand because it’s too mathematical and it’s tied up in some complex model. I think it’s correct. But it doesn’t mean that the linkage is immediate or necessarily rapid.

KEENE: Do you have any worries of wage inflation at this time? I mean, it’s been out there for a year-and-a-half. I keep waiting.

FISCHER: Yes. We are hoping that we will see signs of wage inflation. It was 2 ½ percent last year, or at least one of the measures was 2 ½ percent. Three percent, I think, is roughly where people would like to be.


Q: Thank you very much. You talked about volatility that is current and that is still going to be probably with us for the rest of the year. How do you view the Chinese policy volatility and attempts to intervene in markets that are politically driven that their technocrats know are not viable?

FISCHER: Well, that takes me to a whole host of questions I’ll have to ask you to figure out the answer to that. I think the focus has been on the Chinese exchange rate mechanism more than any other, and the capacity to change exchange rate regimes, it’s that’s—

KEENE: Years ago, Lou Alexander had a wonderful paper on use of our computers, our technology, and the way it cuts two ways in society. Lou, a question for the vice chairman, please?

Q: I believe what Tom’s referring to is just—I believe what Tom’s referring to was at some point I talked about just sort of the linkage between technology, it’s really scope-biased technical change, the issues of how that relates to income inequality.

I guess I’d like to turn that to potential output. In some ways I would agree—I think you’d probably agree that there’s generally a consensus that potential growth, not only in the U.S., but around the world, has slowed. We’ve obviously seen these trends in widening income gaps. There’s a broad understanding that the complementarity between skill and technology is widening the income gap.

I wonder if you’d speculate on how much of the slowdown in productivity growth that we see in potential growth is also related to that and could be thought of as more as a sort of a broader skill problem. It’s an issue in terms of how we face that going forward.

FISCHER: We hear a lot about shortages of skilled labor. People come by from industry, from construction sectors, and so forth, and come and speak to the Fed. And we hear all the time we can’t find skilled workers. So I suspect there are some shortages of skilled workers.

There’s a question frequently of whether they’re receiving pay that would encourage them to continue investing in their skills. And beyond that, I don’t have very clear insights.

We have these amazing new technologies, namely IT and the Internet and all the related services that we have. I once said to somebody, you know, we say that all the time, but actually we’re precisely the people those inventions are aimed at, and so we think there’s tremendous technical progress because it’s the sort of thing we need and we use.

And the answer I got made me think. They said, have you ever been on the subway? And I said yes. He said, what do you think people are all doing on the subway? Well, I knew, they’re all reading their iPhones or whatever it is they’re doing; they’re, whoever they are on the subway, they’re all in that revolution as well. So I haven’t studied subways in other cities and I don’t know enough about it and all that.

But I have a feeling that we’re coming out of a period of a massive crisis, coming out of it relatively well. We’ve almost forgotten what a serious crisis it was. And I’m sometimes amazed when people say the economy has done nothing. I say, yeah, well, what odds would you have given on the economy being at full employment in 2015—

KEENE: Right.

FISCHER: —when the crisis started? So I think we’ve got to wait and see how this works out.

KEENE: But the heart of this matter, to Lou’s good question, is, if we have a part of America that is taking advantage of the technological progress, the challenge of your Fed is you have to manage for that America and another America that’s being left behind. Are you managing for two Americas? Are you managing monetary policy for two Americas?

FISCHER: I think we’re managing for two Americas in the sense that we’re managing to the average unemployment rate. And we look at other aspects of it, people who are part-time unemployed, et cetera. So we have one tool.

There are a lot of things that monetary policy can’t do. There are things the educational system should do. There is not a lot of chance that monetary policy will solve the inequality problem or will solve the gaps between productivity-enhancing technologies that are good for some people and not for others. Those have to do with actions the federal government and state and local governments should be undertaking.

KEENE: Part of the Council on Foreign Relations that’s so good is they establish a debate. Let me turn to Mickey Levy of Berenberg Bank for the question. Mickey, you’ve been a constructive critic of much of what we’ve done in monetary policy. A question for the vice chairman, please?

Q: Yes. You’ve been a champion of inflation targeting. And you and all the Fed members have argued that 2 percent inflation is your long-run goal. And you noted today that inflation, core inflation, 1.4 (percent) is below that.

Presumably, and I’ve heard many Fed members say it, along with ECB members say, that you want to avoid any whiff of deflation because expectations of deflation could lead people to save rather than spend. And we’ve heard recent Fed members over the last couple of years say inflation’s too low, it’s harmful.

So I have a question. Do you see any signs anywhere that inflation is so low it is leading people to save rather than spend? Or do you see any signs anywhere that low inflation is harming the economy?

FISCHER: Well, Mickey, there’s a concern about too-low interest rates in the sense of what happens if you get a negative shock. You know, going back to the zero lower bound is a major concern. And there is the discussion on what is the optimal rate of inflation, as you know, related also to the efficiency with which the economy works in reallocating labor. When inflation is very low, the basic, simplified argument was it’s much harder to cut wages than it is to reduce—to raise them less that inflation. Both of them are real cuts in wages. One doesn’t produce social conflict, the other one does. So arguments like that about the adjustment to the economy were around. We haven’t got any precise evidence of that being related to what’s happening to productivity growth, but that’s a possibility.


Q: Hi. Another question on China, if I may. The IMF said that that was a problem of communication with their—you know, with the data for the exchange rate. So I was just wondering, do you talk to them? Do you—do you plan a trip to China soon? Or do you—do you even have their phone number in your mobile phone? (Laughter.)

FISCHER: The governors of the world—of the leading economies meet every two months in Basel at the Bank for International Settlements and discuss what’s going on in their countries. And so, yes, we do meet—we do meet with our colleagues in China. And a lot of my colleagues will be in Shanghai for the G-20 coming up in February. So those contacts are ongoing. The community of governors is a rather remarkable institution, and you can pick up the phone to anybody in that community to have a serious conversation.

KEENE: Well, in World War II I believe the Eccles Building, the main room was the war room for the generals. Do you have a currency war room at the Fed? (Laughter.)

FISCHER: We haven’t felt a need yet, and we’ll see. But it is nice to sit in this very elegant room—

KEENE: Yeah.

FISCHER: —with plaques on the wall that this is where this operation was planned or that operation was planned.

KENNE: Speak to the global audience that’s asking about dollar strength—about the worry of too strong of a dollar, even as other currencies depreciate. Take us back to Fischer Academics 101. Should we fear a stronger dollar?

FISCHER: Well, at some point currencies can become very, very strong. There’s an agreement among the—among countries. It is an inevitable result of an easy monetary policy that your currency weakens. The agreement is the international community of policymakers frowns upon measures which are undertaken purely to influence the exchange rate. It understands that if you undertake an expansionary monetary policy, cut interest rates, that you’re going to get a weakening of your currency.

If the conclusion is that you’re engaged in an attempt to strengthen your economy and there’s a side result of that on the exchange rate, that’s OK. If you’re engaged purely in using the exchange rate to gain an advantage on other countries, that’s not OK.

KEENE: Ma’am?

Q: Lucy Komisar. I’m a journalist.

A 5 percent unemployment rate, say, 30, 40, 50 years ago, when people were getting factory job wages—$30 an hour—that same number now, when such people are serving hamburgers for the minimum wage, if you just come out with those unemployment rates, that’s not really telling you about the health of the economy and the welfare of the population. Should you add another number—another bit of data to the numbers that you put out that talk about the numbers or percentages of workers who are getting enough money to take care of their families and, for example, don’t have to depend on food stamps?

KEENE: Well, but this goes to the heart of the—of John Edwards, of two Americas. Has the Fed mechanism changed, given an anger that’s out there, as we see in our political debate? Has the process that you’re working with changed?

FISCHER: The process hasn’t changed. We’re using the same set of monetary tools, slightly different because we have this gigantic portfolio at the moment, to work on the aggregates. We don’t have the capacity to ensure that the minimum wage is both wise, in the sense that it’s not creating unemployment, and fair. We’d like—we’d be very happy if there were such a mechanism, and that’s not things that the Fed can do.

Q: But just tell us your numbers.

KEENE: Well, that doesn’t have a number.

FISCHER: The numbers are all there, ma’am.

KEENE: But to the point, the Pew Research recently has come out with a wonderful study of the middle class and the changing of the middle class. You’ve seen this across all of your academic career. Do our central bank institutions need a new calculus to address the polarity of our labor force?

FISCHER: Well, I don’t see a new calculus to address the polarity of the labor force. I can see research, which is taking place and which has led to many discussions, of the relationship between the things we do and the distribution of income—namely, are low interest rates good for the poor or bad for the poor? The people who look at them say, well, they must be bad for the poor because it’s the rich who save, who invest, and so forth. That actually doesn’t make sense. What is good for the poor is employment. And that is a goal of ours, and that is a goal that we succeeded in dealing with very strongly, or the American economy succeeded in dealing with it very strongly. And we have close to full employment at the moment. It may be a bit lower than the current rate, may be about the current rate. We’re in that vicinity. And that is the achievement of the monetary policy that has been followed.

KEENE: We succeeded in getting through the hour without speaking of the next meeting. Could we go out two meetings? (Laughter.)

Thank you, everyone.

FISCHER: Thank you. (Applause.)


Top Stories on CFR

Middle East and North Africa

CFR experts Steven A. Cook and David J. Scheffer join Amnesty International’s Agnes Callamard and Refugee International’s Jeremy Konyndyk to discuss the humanitarian crisis in Gaza.


The highlights from Kishida Fumio's busy week in Washington.

Genocide and Mass Atrocities

Thirty years ago, Rwanda’s government began a campaign to eradicate the country’s largest minority group. In just one hundred days in 1994, roving militias killed around eight hundred thousand people. Would-be killers were incited to violence by the radio, which encouraged extremists to take to the streets with machetes. The United Nations stood by amid the bloodshed, and many foreign governments, including the United States, declined to intervene before it was too late. What got in the way of humanitarian intervention? And as violent conflict now rages at a clip unseen since then, can the international community learn from the mistakes of its past?