Fed Helps Banks, Skips Over Consumers

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Don’t count Dallas Fed President Richard Fisher among those economists who love the Federal Reserve’s ongoing policy of low interest rates. Banks make out like kings, he admits, but savers? Not so much. And that will hurt the economy more than it helps, he contends.

Fisher’s comments come from a Nov. 8 speech to the Association for Financial Professionals In San Antonio. In it, The Dallas Fed chief argues against the Fed’s interest rate policy.

"Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand," he said. Fisher says that low rates have yet to spur hiring or lending to small businesses – two tasks that are at the top of the list as drivers for a booming economy. "It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers," he said.

Fisher says that banks have accumulated a mountain of cash, with more than $1 trillion in reserves, but they’re still not lending. What’s more, the recent move by the Fed to pump $600 billion into the U.S. bond market is a risky move that may hurt more than help the economy.

Fisher says that the $600 billion gambit – dubbed “QE 2” by the financial press (for a second round of “quantitative easing”) is fraught with risk.

"I could not state with conviction that purchasing another several hundred billion dollars of Treasuries — on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities — would lead to job creation and final-demand-spurring behavior," he said. "But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed."

Fisher told his San Antonio audience that he had spent a good deal of time lately talking to Texas business leaders, and his takeaway was that lack of credit wasn’t the problem.

"Several of my CEO and CFO interlocutors report that in the past few weeks the biggest banks have approached them 'literally begging to lend us 10-year money at less than 3%,'" said Fisher. The Fed chief noted that October’s Dallas Federal Reserve’s Texas Manufacturing Outlook Survey showed only 18% of 240 statewide companies were having trouble getting bank financing.

The real beneficiaries of QE 2? Fisher says it’s stock and bond market speculators, adding that he has seen an upward spike in buying activity in the financial markets (especially the commodity markets). 

That once again leaves the American consumer on the outside looking in - and Fisher says that is a big problem. If Congress can’t get its debt problem solved, he says, all the money in the world won’t save the U.S. economy, and the window for taking action on that front is closing fast. "[Can Congress] set a sensible budgetary and regulatory path that incentivizes businesses to put to work the money the Fed is printing?" Said Fisher: "If the Congress and the [President] fail to deliver,
I believe the FOMC will have to consider changing course."

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