The Federal Reserve’s Stanley Fischer on Inflation and Financial Stability
HAASS: Well, good afternoon. I’m Richard Haass,
president of the Council on Foreign Relations. And I want to welcome everyone either in this
room physically or watching us on CFR.org. And I want to thank you for coming to or viewing
the fourth Stephen C. Freidheim Symposium on Global Economics.
This annual effort was created to address the broad spectrum of issues affecting Wall
Street and international economics. And it was established through the vision and generosity
of Steve Freidheim, who’s the chief investment officer, founder, and managing partner of
Cypress Capital Partners. And Steve’s been a good friend of this organization for years,
and we are grateful to him and we’re glad he can be with us today. So, Stephen, thank
you. Today’s event is also presented by the Council’s
Maurice R. Greenberg Center for Geoeconomics, formerly led by Sebastian Mallaby, currently
by Michael Levi, and we’re glad to have the two of them, as well. And the symposium this
year is tied to the 100th anniversary, the centennial of the creation of the Federal
Reserve System. And throughout the afternoon, we will hear from experts on monetary policy,
present and former practitioners about — about the Fed, about how its approach to monetary
policy has changed over its century-long history, and we’ll look at monetary policies more broadly,
given where the world economy is. The line-up is about as impressive as it gets.
In a few minutes, we’ll hear from Stanley Fischer, who’s vice president of the Federal
Reserve, and Larry Fink, who’s chairman and CEO of BlackRock. More important, he’s a member
of the board of directors here at the Council on Foreign Relations.
(LAUGHTER) Just to give you a sense of perspective. And
it’s a real pleasure personally and professionally for me and for us to welcome back Stan, who
was a distinguished visiting fellow here at the Council prior to his — prior to his confirmation.
Then we will segue into a second session which will look at the history of the Federal Reserve
System and some of its current directions. And we’ve got Liaquat Ahamed, one of the great
writers about economic history. We’ve got our newest senior fellow, Willem Buiter. We’ve
got Mark Gertler and, again, Sebastian Mallaby on that panel. And then, third, and last but
not least, we’ve got Arminio Fraga, Jacob Frenkel, Philip Hildebrand, and Mervyn King,
four former central bankers of Brazil, Israel, Switzerland, and England, respectively, with
our own Roger — with Roger Altman. And that will be the — again, the third of three sessions,
and it will look really at the question of the Fed and its relationship to other central
banks around the world, as seen from abroad. So as you can see, it is a remarkable schedule.
Timing could hardly be better, given what’s going on in the world. So, again, thank you
for being here. Thank you again to all those who made it possible and who have agreed to
participate. And with that, I turn things over to Larry Fink and Stanley Fischer.
(APPLAUSE) FINK: Stan, how was your commute today? Good?
FISCHER: It was just fine, thanks. FINK: It’s a real pleasure for me to be here
today. I’m going to welcome everybody to the Council on Foreign Relations for the opening
session of the Stephen Freidheim Symposium on Global Economics with Stan Fischer. I want
to thank the CFR for hosting this event, and it’s a real pleasure for me to be interviewing
my friend, Stan Fischer. Stan is one of the giants of capital markets
and the central banks. He’s had an impact on policy and policymakers across the world.
He influenced many people possibly in this room, but many people through his work as
an economist and a professor, and also through his own distinguished and notably successful
career as a central banker. Prior to taking the vice chairman’s seat at
the Federal Reserve this past May, Stan was formerly the governor of the Bank of Israel
from 2005 to 2013. His leadership and his skills helped Israel weather the crisis exceptionally
well and provide an example for many nations around the world. Importantly, though, Stan’s
— prior to Stan’s work in Israel, Stan worked in the private sector as a vice chairman of
Citigroup. He was the first deputy managing director of the IMF and the chief economist
for the World Bank. And then, before that, Stan was a professor of economics at MIT,
where he was a thesis adviser to future central bankers like Ben Bernanke and Mario Draghi.
Born in Zambia, and did his studies at the London School of Economics and MIT, and also
taught at the University of Chicago. Throughout Stan’s career, he’s been an adviser, been
a source of wisdom, and a friend to people making some of the most difficult and most
challenging decisions on behalf of their nations and on behalf of the entire world. So it’s
an honor for me to be here sitting next to Stan and interviewing him.
But before I start the formal interview, I just need to — I know a lot of you really
want to know what’s going to happen in interest rates, and we’re not here about — talking
about that today. And so I just — so I’m not going to ask Stan any of those questions.
I don’t want to be presumptuous of it, but I would — when we go into the Q&A, I would
ask all of you not to be presumptuous of a question that Stan’s not going to be able
to answer. So let’s try to find some questions that we know he can answer, and let’s not
put Stan on the spot here. So with those conditionalities, let me begin.
All set, Stan? FISCHER: All set, thanks.
FINK: Perfect. So you have observed the Fed for many years from an extraordinary position
from a variety of vantage points, as I said, a professor from MIT, the World Bank, the
IMF, the private sector, the head of the central bank of Israel. How have you seen the role
of the Fed evolve from all these different perspectives? And what did you learn about
the Fed and the effectiveness through all these different perspectives?
FISCHER: Well, the — I started learning about the Fed when I was an undergraduate. And in
those days, we spent a lot of time on the Fed’s annual report of 1923, which set out
how it thought monetary policy worked. I was amazed to discover in the NBR’s most — one
of the NBR’s recent lists of papers, a paper saying, “When did the Fed give up on its 1923
principles?”, which included preventing banks’ lending for speculative purposes. That was
one of the things that they were supposed to stop.
And the answer was, it’s never quite clear. It’s not quite clear when they gave up, but
as late as 1970, they were still referring to that. So I’m afraid that what goes on is
— some of it is learning what works and what doesn’t. Some of it is relearning what works
and what doesn’t. And you’re quite hard put to figure out when they’ve learned things
and when they’ve unlearned things. What I think we have now is a situation in
which we understand the monetary policy aspects, what you can do with changing the interest
rate and also with the most recent crisis, with other operations, involving asset markets,
quantitative easing in particular, and I think that is fairly well established, fairly well
understood, and will continue to be a part of monetary policy for a very long time.
I expect that the approach to monetary policy — and I’m talking about monetary policy — known
as flexible inflation targeting, namely you try to keep inflation under control at around
2 percent — but you also take account of what’s happening to the economy, what’s happening
to output, that that general approach will be there for a very long time.
The other fact which has come up is, should the Fed be involved in regulation in stabilizing
the financial system? And that was something that was believed in 1923, was regarded as
not very important in the early 2000s, and is now very important. And I think we’re learning
that. I don’t think we’ve learned how to deploy it, but we’ve learned that we have to figure
out how to undertake financial sector stabilization, and that’s something which we’ll develop in
the next few years, and I think we’re beginning to get a hold of that — that material now.
FINK: I’m going to ask you a question related to what you just said. Do you believe that
central banks around the world, including the Federal Reserve, are the best equipped
to handle this macroprudential policy? Or could it be the SEC or other agencies then?
FISCHER: I think the — with regard to the banking sector, the central bank — or with
regard to — whoever it is that supervises the banks is in a very good position to do
macroprudential. And typically, although not in the United States, in smaller countries
and less sophisticated economies, the knowledge on how to deal with the financial sector is
centralized in the central bank. That’s not necessarily the case in the United States.
The British in 1997 gave the central bank independence one day and the next day took
away bank supervision from them. And I think people in the central bank were
very glad to have the supervision taken away from them in 1997. They were more glad to
get it given back to them in 2008, after we’d seen the first bank runs in Britain for 140
years as a result of the new institutional structure that had been developed, which put
bank supervision — financial sector all together outside the central bank. Now it’s more in
the central bank than it is anywhere else, and we have two very different models, ours,
which is very decentralized, with the Federal Open — with the Financial Stability Oversight
Committee, the FSOC, in charge of coordinating a bunch of independent regulators, which each
of which wants to guard its independence, versus the British, where the authority is
very clearly in the central bank, and we’ll have to watch and see how those two work out.
FINK: This may be an unfair question, because you’ve only been at the Federal Reserve for
a number of months, not a complete year. What surprised you in your most recent period of
time there that you didn’t expect when you were looking from the outside in?
FISCHER: Well, I’d known that the quality of the staff was very high. It is exceptionally,
exceptionally good. I think it’s true that I haven’t yet had a question about things
the Fed should be doing that I have had to send out a question and not got an answer,
have gotten a good answer on all of those, and it’s a very impressive bunch of people
there. That isn’t a big surprise. That’s a small surprise.
The biggest surprise is this Sunshine in Government Act, which forbids the board of the IMF, the
seven members — let me say this carefully — the seven members who in principle should
be the members of the — of the Federal Reserve Board actually were only at five at present,
and the odds on another two being nominated and approved before twenty-something is — is
pretty low. So we’re operating with five. We are not allowed to meet — a majority of
the board cannot meet… FINK: Together.
FISCHER: … together, if it is likely that a subject related to monetary policy will
come up at such a meeting, without it’s being declared a formal meeting, with minutes being
taken, and if it’s a closed meeting, without it being recorded, why it should be closed.
This means it’s very hard for the seven of us or the five of us today to sit down and
discuss issues in a very informal way. And I think that is a big surprise. I hadn’t understood
it. People say, “I told you that,” when I say to them it’s a surprise. Well, there’s
a story — which is a long one — which ends with somebody complaining about somebody who
says, “That guy knows everything but realizes nothing.” Well, I knew that, but I didn’t
realize what it meant. And it’s a powerful impact. It has a powerful impact.
FINK: But you can have your assistant meet with the other five governors’ assistants,
correct? FISCHER: As far as I know, yes. This is — you
don’t want to answer… (CROSSTALK)
(LAUGHTER) FISCHER: But, yes, in principle, you can go
around and talk to each of your colleagues. FINK: It takes longer.
FISCHER: It takes longer, and there is something about a group discussion that is different
than a sequence of two-person discussions. FINK: I agree with that. This is another unfair
question, because you’ve only been there a very short time, but what type of mark do
you want to leave at the Federal Reserve, if there is such a mark? You know, what do
you want to be known for? FISCHER: My guess is that I want to be known
for having done the job well and appropriately. And I’ll leave it at that.
FINK: I think that’s a fair one. So some of your students — Mr. Bernanke and Mr. Draghi
— have played an important role in the history of the central banks. Do you think they paid
any attention to you in their dealings with monetary policy from what theoretically they
learned as a thesis adviser? FISCHER: Well, certainly when Mario Draghi
was a student, I wasn’t the main teacher on monetary policy. Franco Modigliani was. And
everybody learned something from — from Franco. And when Ben was a student, he — I may have
taught a bit, but, you know, Ben did his own research, which — the most important research
relevant to what Ben Bernanke did between 2007 and 2011 was Ben Bernanke’s research
on the monetary mechanism, what is it that matters, and whereas the theory had been Milton
Friedman’s argument had been the quantity of money really matters, Ben’s research suggested
to him that the amount of credit really matters, that the credit mechanism is really critical
to how the economy works, which implies that if your banking system breaks down, you have
a huge problem. And Ben understood that. And some of the actions
which he, together with Tim Geithner and with Hank Paulson, at the very beginning undertook
were based on his own research. And I didn’t tell him he had to do that. He did it, and
he did it extremely well. So I think that they learned a lot at MIT about being pragmatic,
about not being too — too confined by their theoretical apparatus — whatever the plural
of apparatus is — and learned that when you do applied work, you really have to look at
facts and come up with practical solutions. That was very deep in the MIT approach.
FINK: So taking that, what do you think today — how would you describe the central objectives
of the Federal Reserve is today? FISCHER: Well, we have what the law saws,
and our law is basically that we have to achieve two goals. One is maximum — we put in parentheses
afterwards — sustainable employment, and the second is price stability, which is defined
as 2 percent inflation. Now, those are the underlying goals that we have to attain, known
as the dual mandate. And we have now the additional issue, which is critical, of figuring out
how to combine that with insuring financial sector stability.
What we’ve seen since 2007 is what a mess you can get if your financial sector gets
into severe trouble. That was one of those other things that you know, and there was
a Reinhart-Rogoff book called “This Time is Different,” which was written before the crisis,
but which drove home the point that a recession that is accompanied by a major financial crisis
is going to be a very severe recession and take much longer to recover from than a standard
recession. And I think our challenge is to make this recovery from that one that we won’t
have to go through again, one hopes ever, but at least for a very, very long time.
FINK: So how much progress do you think we’ve made in financial stability since the financial
crisis? FISCHER: I think the — we’ve done a lot on
stabilizing the — taking actions that should stabilize the banking system. I think the
measures of increasing bank capital, of increasing required liquidity by — by the banks and
then in other areas, requiring more — most derivative transactions to go through organized
exchanges, et cetera, those measures I think for the banking system in the first instance
and a few that deal with other institutions, have made a lot of progress, and will ensure
a far more stable banking system for some time. As long as the regulators are aware
that regulation is a sort of game of cat-and-mouse — there are regulations, people try to find
their way around them, you try to catch them, and may put — change the regulation appropriately
— you can’t sit on a bunch of regulations and expect that you solved any problem forever.
You have to be vigilant in dealing with what — with developments in the economy.
I don’t think we’ve solved the problems of how to deal with what’s known as the shadow
banking system, the non-banking financial system, which is unique in the United States
in being very large relative to the banking system. Twenty percent of the financial system
measured by the size of assets is banking system in the United States and 80 percent
is non-banking. In other countries, the proportions could be reversed.
FINK: But also that’s a good thing, because we have here capital markets and this is why
possibly we have — we’ve been able to stabilize faster than other markets that are more dependent
on just banks as a source of capital, correct? FISCHER: Well, you’re — you’re a co-discoverer
of Alan Greenspan’s spare tire theory of financial systems, which was that ours is better because
there are all these spare tires around. If you can’t get — if you’ve got to put on an
extra tire, you can get it at somewhere other than the banking system. And I think that’s
true. But I think we couldn’t have actually got to where we’ve got if it hadn’t been for
the speed with which the Fed turned to stress tests early in 2009 and implemented them and
recapitalized the banks, whereas the Europeans are still about to do that. And the speed
with which the American regulators and monetary policymakers were willing to — were willing
and took a risk in undertaking is practically unique.
FINK: Do you worry about a persistence of low interest rates worldwide and the impact
on savers? FISCHER: Well, we recognize — it’s not an
accident that we call the increase in the interest rates, which Larry has kindly put
off — off our agenda for the rest of the day — it’s not an accident we call it normalization.
Zero interest rates are not normal. And operating with them is very difficult. So I think this
is not normal. It creates certain difficulties. But what we have learned is that you can operate
reasonably well in these circumstances, as the Fed did from 2008 until today.
FINK: But my worry is — you know, I wasn’t trying to get into the interest rate forecast
— I was trying to think about what the inequalities it creates, people who — obviously, low interest
rates have really benefited the equity markets, as people are looking to put money elsewhere.
And it has created, I think, more societal divisions. Thomas Piketty’s book discusses
that. Any thoughts on that? Or any issues around this whole issue of the people who
have had money and capital and financial assets have done quite well, but so many parts of
the economy are absent that type of investment? FISCHER: Well, I think it’s clear that those
people who have their assets all in government bonds, which were short term by — for whatever
reason have — have not done well in this crisis. But, you know, there are a lot of
people who are not wealthy who nonetheless have savings in funds and their pension funds.
So it’s not uniform that if you’re — if you’re poor, you’re going to be hurt by this particular
type of monetary policy. On average, I suspect, it would be easier for people who are poorer
if bank interest rates were higher and if other interest rates were higher. But it’s
not guaranteed to be that way. FINK: Before opening for questions, I want
to ask you one more question. What does Stan Fischer worry about?
FISCHER: You’re talking about policy? (LAUGHTER)
FINK: No, I mean, it could — are you coming home for dinner? No…
FISCHER: We’re — sort of short term, the big issue we’re discussing now is liftoff
of interest rates. That’s a lot of thinking going on in the Fed now. When is that going
to happen? How’s it going to be done? Are there techniques we’re putting in place with
reliance on the interest rate, on excess reserves as the main instrument for getting the interest
rate on other assets to change and a lower bound put in place through the use of reverse
repos, is that going to work exactly as we planned? Very little works exactly as planned,
and what are alternatives if that doesn’t work? I think about that a great deal.
If you ask in a longer-term sense, I’m concerned about the maintenance of the important success
of monetary policy in the United States, which is that the Fed, with respect to monetary
policy, is completely independent. And it is particularly independent of political views.
The Fed really does not, as far as — there’s nothing I’ve seen which suggests that we’re
sitting around wondering whether we’d win the election if we did this, rather than that,
because we don’t run in the elections. And there are sort of measures being discussed
about supervising what we do more closely. We are strongly in favor of the modern approach
to central banking, which is, the central bank has a clearly defined mandate and it
is transparent and it is accountable to the people who define that mandate. And that mandate
is defined, in essence, by the Congress. And we should be transparent. We are remarkably
transparent as central banks go. Our minutes are published within a couple of weeks of
our meetings. Within a period that is very short — five years — transcripts are published.
It’s usually much longer in other countries, of our meetings. And I think the Fed is remarkably
transparent. But there are those who want us to be more
transparent. And I don’t think — there comes a point when you’ve got to have a discussion
where you can say things that you don’t necessarily want to be published. What is the problem?
The problem is, you sometimes discuss — you need to discuss out-of-the-box ideas, particularly
if you’re in a crisis of some sort. You put those in something that’s going to be published,
in essence, two weeks later, you’re going to frighten the markets and — but you can’t
have an organized discussion without having — in our framework — without having them
be published. That’s something that worries me, and I would add to that a little bit,
that I fear there may be a future crisis, financial crisis, in which we’ll be very sorry
that the Fed’s powers to act as lender of last resort have been transcribed — are being
constrained significantly by changes in the Fed’s authority with respect to emergency
loans that were made in the Dodd-Frank law. Those are things which I think we have to
think about and continue to think about as we think about the long-run ability of the
central bank to do what central banks do, which is to stabilize short-run panics and
short-run crises, and that is up in the air at the moment. Let me just add something.
We frequently here�it said, have you fixed the too-big-to-fail problem? Well, we’d all
like to fix the too-big-to-fail problem. I hope I never have to deal with a big institution
that is about to fail and have to make decisions of the quality that were made, of the type
that were made in 2007, 2008, 2009. But my answer to that is, if anybody ever
tells you they’ve solved the too-big-to-fail problem, don’t let them be a supervisor of
the financial system. (LAUGHTER)
Because if they think they’ve really finally solved this problem, they haven’t looked at
monetary history, they haven’t looked at banking history, and they haven’t looked at financial
history. These things happen. I think they even made a movie about that. And you’ve got
to deal with them with all the tools you’re legally allowed to use. And it’s important
that you don’t take away — that it’s important for the stability of the economy that you
have those tools when unexpectedly one night — it always happens at night…
FINK: Or a weekend. FISCHER: … on a weekend, somebody calls
you and says, “You’ve got to do something. This institution is heading for big trouble,
which will cause a major conflagration.” That’s when you need these powers.
FINK: I would imagine today, though, with all the higher capital standards and liquidity
rules, as you suggested, all the things to have greater protection, if there is another
big crisis, it’s probably not going to be one institution, because it could be — it
could be more. And, I mean, that’s… FISCHER: Well, yeah — all right. Change the
word “institution” to “institutions.” FINK: Institutions, yeah.
FISCHER: You really need to have those powers, and some of them have been taken away.
FINK: I agree with that. It’s time to open up for questions. I would remind everybody,
we’re being webcast, so raise your hand, I’ll select the person. Wait for the microphone
to come, and then, importantly, one question, please, and two, address who you are. So there’s
a question right over here, and two questions there right over here first.
QUESTION: Hi, Sy Jacobs, Jacobs Asset Management. You spoke earlier of the 2 percent inflation
target. And I was hoping you could address the evolution of it, where for at least most
of my lifetime and a lot of years beforehand, the goal was more generally lower — lower
inflation is better than higher inflation. And, in fact, through our economic history,
inflation under 2 percent was�in both normal and coincidental with prosperous times. So
how did we get to this point where now the Fed seems to be talking about 2 percent inflation
target as something we need to push inflation up to, that somehow 1 percent inflation is
dangerous when previously it was prosperous? FISCHER: I’m not sure whether — whether the
correlation of low inflation with — with prosperity is exactly right. But let’s leave
that aside. How did we get to 2 percent? There is — there is a tradeoff. Obviously, high
inflation is bad. There are lots of — lots of papers being written explaining why that’s
the case. Why not zero? The concern is about the real interest rate that is whether you
could get — sometimes it now seems, in order for the economy to get to full employment,
you need a real interest rate that is the interest rate minus expected inflation, to
be negative. If zero inflation is your target, then people
expect zero inflation, and you can’t push the interest rate below zero, then you’re
stuck. So that 2 percent is a — is a buffer which means there’s some ability to get the
real interest rate to be negative without overdoing on that issue. In some — Olivier
Blanchard, my co-author and friend, who’s a chief economist at the IMF, has argued that
number shouldn’t be 2 percent, but should be 4 percent. I disagree. I think that we’ve
got to keep inflation significantly lower than 4 percent, but that you need some cushion
against the need for sometimes negative real interest rates, I do believe. And similar
argument, it’s much easier to — if you have zero, you’d have limits on how much you could
reduce wages, if you needed to reduce them, and it’s a little easier to raise wages than
to reduce them, so that’s another reason why a little inflation eases the system.
FINK: Question back here? QUESTION: Gary Ross of PIRA Energy. Saudi
Arabia just gave the world an over trillion-dollar tax cut. Are you more worried about deflation
or inflation? FISCHER: Well, you’ve put your finger on a
nice complicated question. (LAUGHTER)
The — you know, the argument I just made about why you want to get inflation up to
2 percent would suggest that I should be very worried. I’m not very worried, because the
deflation or the — the lower inflation that we’ll get from the lower price of oil is going
to be temporary. They’re not going to keep driving the price of oil down. So we’ll have
a short period, and I hope it sticks there, of declining prices, and that will reduce
the inflation rate. I wouldn’t worry about that very much, because
that period of — of low inflation is actually happening in a time — as a result of a phenomenon
that’s making everybody better off, and furthermore likely to increase GDP, rather than reduce
it. So I wouldn’t worry about that too much, and frequently central banks take out the
price of energy from the price index, because movements in energy are very — energy prices
are very volatile and, you know, they go, quote, “in the opposite direction.” This is
related to something called supply shocks, but that’s for the advanced meeting for later.
And this is a supply shock, and you treat them differently than a shock that’s caused
by an increase in demand. So I would worry less about that.
FINK: Before I get another question, Stan, a couple governors used to tell me there was
something called good deflation and bad deflation. Do you believe there could be such a thing,
like lower oil prices conceivably is good deflation?
FISCHER: Yeah, I mean, that — that sort of thing is — is positive, if that’s — if that’s
the cause of it, yeah. FINK: Interesting. Back there. Yes.
QUESTION: Rachel Robbins. Hi, Stan. Stan, can you talk a little bit more about the shadow
banking system and what, if anything, you think should be done at a policy level to
ensure that there is the financial stability over this 80 percent that you don’t — you
have less control over? FISCHER: Well, the — you know, there are
real institutions in the — in the shadow banking system. There are hedge funds. There
are insurance funds. FINK: Even asset managers.
(LAUGHTER) FISCHER: Even asset managers, I’ve been reliably
And other financial institutions, some of those have regulators. The insurance companies,
for instance, have regulation. Others do not have — have regulation. And what is being
done right now is mapping out this system. One of the most complicated maps you’ve ever
seen was produced in the New York Fed showing the shadow banking system and the interactions
between it and, you know, everybody is talking to everybody else, doing business with everybody
else, it’s to understand what that system is as a system, how it interacts with the
banking system, and who has any authority that will enable them to take action — undertake
actions to deal with a firm, which is if it’s large enough or interconnected enough, would
create a big problem if it failed. That’s what we’re doing now.
And then, if it’s — if we the Fed have the authority to regulate it. Then on the basis
of that analysis, we would then go ahead, if we have the authority — for instance,
we have control over margin requirements — and if we don’t, then it goes to the FSOC and
is discussed there. FINK: Right up here.
QUESTION: Stan, put on your professor hat. Put on your professor hat, Stan, and suppose
you’ve set a question for the prelim that said we’ve had negative real interest rates
for three years in much of the world and we still have persistent disinflation. What’s
going on here? FISCHER: Yeah. Well, were you a student at
Chicago when I was there? QUESTION: Yes.
(LAUGHTER) FISCHER: Well, I’ll let you in on a secret.
Sometimes you put questions on the prelims when you didn’t know the answers.
(LAUGHTER) QUESTION: I’ll let you in on a secret. I know
FISCHER: But seriously, before people think that’s true, I think that what we’ve seen
— we’ve seen a real recovery — we’ve seen the return of the United States economy to
a growth rate that has been pretty steadily about 2 percent to 2.5 percent, occasionally
3 percent. It’s been fluctuating in that area. So I think in the United States, first of
all, it isn’t deflation. We have low inflation. We do not have prices declining. So I think
in the United States, the negative interest rates have worked. At the long end, by the
way, the interest rates have typically been slightly positive in real terms, so we’re
talking about the short-term interest rate. And I think it’s working. It’s just taking
its time. If you look at the things that haven’t really recovered, the construction set is
remarkably weak, and when you think of what happened up to 2007-2008, you can understand
why that sector hasn’t fully recovered yet. So I think you can understand this in terms
of the things that Reinhart and Rogoff wrote about.
I don’t know enough — Britain is roughly in the same situation as us. European inflation
is positive, not negative. So I think the — if your answer is, why are we growing so
— if your question is, why are we growing so slowly rather than why is inflation negative,
which I don’t think it is, I think there are a lot of very complicated issues, among them
the decline — apparent decline in the rate of productivity growth in the — in the United
States economy and globally. QUESTION: (OFF-MIKE)
FISCHER: Good, well, coming from you, it’ll do.
(LAUGHTER) QUESTION: Stan, my name is Hariharan. Almost
coinciding with your start at the Fed, is that an important pivot in the Fed communications
now, which starts to recognize the importance of international matters, like the dollar
and fragilities in the global system because of rate policy? Because historically, we’ve
always been brought up thinking that the Fed took decisions based almost entirely on a
domestic policy initiative. FISCHER: Yeah, well, if there’s a connection,
it’s coincidental. The fact is, the U.S. economy is far more open than it used to be. We do
much more international trade than we used to. We’re more interconnected on the side
of goods production and demand for goods than we have been for a very long time, possibly
ever, I think, now. So we’re more open, and that’s a reason to look at it.
The other reason may be that because the rest of the world is rising to our standard of
living, because asset movements are so much larger than they used to be, capital — I’m
going to digress, footnote.One of the questions that — that interests me is, what is it that
has made the United — at the end of World War II, the U.S. economy accounted for 50
percent of world GDP. You can understand why an economy that big would have an influence
on the rest of the world. It’s now about 22 percent. But it doesn’t seem to have much
less of an impact. Why not? I think it’s because the capital markets have
become more and more important, and New York is still a major capital market of the world,
and what interest rates are here, what rates of return on equity are here influence the
rest of the world, and, in turn, comes back to influence us, so I think that is another
reason why there may be — if this is true — why there may be more attention to developments
in the rest of the world, as we — as we look at interest rate setting.
FINK: Byron? We need the microphone up here. QUESTION: Byron Wien, Blackstone. In 2008,
the Federal Reserve had a balance sheet of $1 trillion. Today, it has a balance sheet
of over $4 trillion. Some would argue that a significant amount of that expansion of
the balance sheet went into financial assets, where the purpose of it was to stimulate the
U.S. economy. And the monetary policy is a very inefficient way in my judgment to try
to stimulate the economy. Now we’re at a point where Mario Draghi is being encouraged to
do the same thing in Europe. Is it going to work there? And did it work in the United
States? FISCHER: Well, I’ve said a few times that
I think it did work in the United States, and I haven’t changed my mind since — since
then. Mario Draghi is dealing with a very, very difficult situation in terms of both
the economics and the capacity of the European Central Bank to make decisions. I believe
that the same arguments that are true for quantitative easing as a way of dealing with
the U.S. economy do hold in Europe. And it looks like that they may be moving in that
direction. If they do, I expect that will have a positive effect.
You have to always, in economics,�in anything, move away from the belief that something is
a magic solution. There are no magic solutions in economics. Does it have a positive impact?
Yes. Is it all that needs to be done? Probably not.
FINK: Way in the back. QUESTION: Andrew Gundlach from Arnhold Bleichroeder.
One of the imbalances present in ’07 that are still present with us are the balance
of payments — balance of payments imbalances, surpluses in Asia, deficits here, and then
surpluses in, say, Germany, Holland, deficits in the other European countries. Is that a
source of concern to you? How do they get cleared?
FISCHER: The United States’ current account deficit is much — is much reduced. China’s
surplus is much reduced. And they get cleared over the course of time by movements in the
exchange rates and by asset movements. So I don’t think those remain the problem that
they were when the — when the Great Recession began.
As to Germany and intra-European imbalances, there is a problem there which arises from
the fact that exchange rates are fixed and can’t adjust to deal with Germany’s very large
surplus and the smaller surpluses of the others. But it is worth noting that the countries
which had very huge deficits, like Spain, like Greece, have got much smaller deficits
now. So the adjustment is taking place, and we shouldn’t expect everybody to have a balanced
account. One of the reasons for global trade is that some countries save more and some
countries invest more relative to their income. And the ones who want to invest more and have
profitable investments should be able to run current account deficits.
FINK: OK. Henny? QUESTION: Henny Sender, the Financial Times.
You rightly point out the disproportionate effect the U.S. has in the world today. How
realistic is it for other countries, whether Brazil or China, who have said when the Fed
makes monetary policy, they need to take into consideration the impact it has on the rest
of the world? How sympathetic are you to that plea, as somebody who’s been in a very different
central bank? And how realistic are those pleas? Thank you.
FISCHER: Well, I’ll answer by giving you the answer I used to give when I was in another
job. I used to say it would be much more convenient for us if the United States had a higher interest
rate — Israel didn’t have a financial crisis, so it didn’t go through the need for a zero
interest rate, but you couldn’t not follow the United States interest rate, because otherwise
— sort of waves of money would have been coming into this very small economy and caused
a huge appreciation which would have had a very negative effect on growth.
But I used to say, I’d much rather have to struggle with a low United States interest
rate and a growing U.S. economy than have a nice comfortable interest rate from the
viewpoint of the Bank of Israel, where I was then, and have a slowly-growing American economy.
The income effects of U.S. growth are very, very important for the rest of the world,
and so I don’t even think that the argument “You should take us into account,” et cetera,
and not raise — and not reduce your interest rate as much as you plan, I don’t think that’s
good, either, for the other countries. FINK: Yes?
QUESTION: I’m Jim Nathan. I’m from — I’m Jim Nathan. I’m from Alabama. I don’t quite
get… FINK: You won.
QUESTION: We did. (LAUGHTER)
I don’t — I don’t quite understand the argument that — that higher interest rates would help
mitigate inequality. People of modest means carry very high credit card balances. They
have to go for payday loans. They hope to buy a mortgage. If a mortgage is so difficult
and so high that they can’t carry the cost, it’s extraordinarily difficult. I don’t get
— I mean, who saves? The people who save usually have disposable income. Poor people
don’t have disposable income. And I could go on. And modest — and�low interest rates,
you know, they may benefit wealthy people, but at least they don’t hurt poor people.
FISCHER: Well, I’m not sure that — think of those poor people who don’t work are on
— who are retired, in essence, work on Social Security and have savings. Those are the people
who will lose something by having — having higher interest rates. And credit card interest
rates don’t adjust that much to what the — what the Fed’s market interest rate — the Fed’s
interest rate is. So I think that possibility is out there that
the — that the very low interest rates have some impact, but I think typically marginal.
You say none at all. I say some, but not very large on the distribution of income.
FINK: Yes? QUESTION: Niso Abuaf, Pace University. What
do you think of the research that suggests that the political and regulatory environment
in the United States causes financial crises, whereas the ones in Canada does not? Thank
you. FISCHER: Well, the Canadian — the Canadian
and — to some extent — the Australian, and at one point you could say the British financial
systems haven’t had financial crises, and to attribute that solely to the supervisory
system seems to me inaccurate. The Canadian banking system has several very large banks
and they have one — well, they have until recently one aspect that U.S. banking system
didn’t have, which was Canada-wide branching. So they managed to get a lot of offsetting
shocks taking place during the history of the Canadian economy.
The — so I don’t think that’s alone what caused the stability of the Canadian system
or since the 1930s, of the Australian system. Beyond that, it is clear that the complexity
of the American system and the complexity of the regulatory system may have something
to do with the difficulty of maintaining banking sector stability in the United States. We
did run for�eighty years without a major banking crisis, until the present crisis,
and I hope we run for more than�eighty years without another one.
FINK: One last question. Yes? QUESTION: (OFF-MIKE) was wondering how (OFF-MIKE)
FINK: Try another microphone. QUESTION: Peter Hooper from Deutsche Bank.
Just wondering how you assess the labor market currently. And in particular, do you favor
U6 or U3 in terms of gauging how much slack there is? And the behavior of wage inflation,
is it surprising we’ve had so little pickup? Or are we starting to see something? How much
has pent-up wage disinflation affected things? Just a broad sense on your view of the labor
market. FISCHER: Well, the really big fact that I
think about with the labor market much of the time is the fact that unemployment rate
has come down much more rapidly than was expected as little as a year-and-a-half ago. Now, you
can then start saying, well, you should look at a broader definition of unemployment and
all that, but that, too, has come down more recently, quite rapidly. U6 has come down
quite rapidly, as well. So I think the labor market has shown behavior
that is not fully consistent with the way GDP is growing, unless you assume that productivity
growth is down, which I think is measurably true at the moment, and we don’t know how
long — how long it will continue. You know, it is often the case in economics that you’re
waiting to see a phenomenon. Somebody did something that should have produced X, and
there’s no X on the horizon. My experience has typically been that if you wait another
six months or longer, X will suddenly make a belated appearance.
I don’t know if that’s what’s going to happen. That’s what I think may well happen with wage
inflation. We’ve just got to wait and see if it does happen, well and good. If it doesn’t,
well, I don’t know about well and good. If it doesn’t, well, that’s good news on the
inflation front. I keep getting people sending me very nice
charts which essentially show a curve that — if I’ll do it from your angle that’s sort
of going down — sort of that’s very flat at the bottom and is just about to be turning
up. That’s the wage inflation. And there is always some definition of wages and some definition
of unemployment, such that that is true. Whether that’s what’s actually going to happen, we
don’t know, but I think that has a significant chance of being about to happen, about to
— with “about to” being several — a considerable time, to coin a phrase.
(LAUGHTER) FINK: Well, this ends this session. I want
to thank Stan. (APPLAUSE)
I think — I think we all learned why the United States is better off having Stan Fischer
as our vice chairman of the Federal Reserve. And, Stan, thank you again for your public
service. FISCHER: Thank you.