Fed’s Fis­cher all for govern­ment spend­ing

The Myanmar Times - - International Business -

PROP­ERLY directed govern­ment spend­ing – in­clud­ing in­fra­struc­ture spend­ing as Pres­i­dent-elect Don­ald Trump has promised – can boost the econ­omy’s pro­duc­tive ca­pac­ity, US Fed­eral Re­serve vice chair Stan­ley Fis­cher said.

Mr Fis­cher said there is dis­agree­ment about what spend­ing poli­cies are most ef­fec­tive but “some com­bi­na­tion of im­proved pub­lic in­fra­struc­ture, bet­ter ed­u­ca­tion, more en­cour­age­ment for pri­vate in­vest­ment, and more ef­fec­tive reg­u­la­tion all likely have a role to play in pro­mot­ing faster growth of pro­duc­tiv­ity and liv­ing stan­dards”.

Al­though de­tails re­main un­clear, Mr Trump’s eco­nomic plan in­cludes the pledge for a mas­sive in­fra­struc­ture spend­ing pro­gram, which he has said will cre­ate jobs.

Like Fed Chair Janet Yellen in her tes­ti­mony to Congress last week, Mr Fis­cher said fis­cal poli­cies that im­prove pro­duc­tiv­ity can help address some of the dis­ap­point­ing as­pects of the cur­rent re­cov­ery.

For too long, the Fed “has been the only game in town” ad­dress­ing macroe­co­nomic pol­icy, and “along some di­men­sions this has not been a happy re­cov­ery”, Mr Fis­cher said in a speech to the Coun­cil on For­eign Re­la­tions in New York.

Pro­duc­tiv­ity growth in the past decade has been half the rate of the long-run trend of 2.5 per­cent, and if this slow pace con­tin­ues it “would have wide-rang­ing con­se­quences for liv­ing stan­dards, wage growth, and eco­nomic pol­icy more broadly”, Mr Fis­cher said.

Weak de­mand and slow in­vest­ment, in­clud­ing in the oil sec­tor, may be fac­tors in the slow pro­duc­tiv­ity growth, he said, which in turn is keep­ing in­ter­est rates low.

How­ever, Mr Fis­cher cau­tioned that there is a “jus­ti­fied con­cern” about plans to in­crease spend­ing in an econ­omy that is very close to full em­ploy­ment.

Many econ­o­mists have warned that the spend­ing Mr Trump pro­poses would ex­pand the deficit, re­quir­ing in­creased debt, and fuel in­fla­tion.

“There’s ob­vi­ously enor­mous un­cer­tainty about what’s go­ing to hap­pen,” Mr Fis­cher said in re­sponse to ques­tions.

“Fis­cal mea­sures which in­crease growth over a sus­tained pe­riod would be ter­rific. Oth­ers would have short­term benefit and would then re­quire fur­ther ac­tion down the road as the econ­omy re­ally hits full em­ploy­ment.”

The Fed is widely ex­pected to raise the key pol­icy in­ter­est rate in De­cem­ber, for the first time in a year and only the sec­ond time since the end of the fi­nan­cial cri­sis.

But many worry in­ter­est rates will have to in­crease much faster if in­fla­tion ac­cel­er­ates.

The Fed of­fi­cial, who is the for­mer chief of Is­rael’s cen­tral bank and for­mer No 2 at the In­ter­na­tional Mone­tary Fund dur­ing the Asian fi­nan­cial cri­sis, also de­fended the Fed’s in­de­pen­dence from po­lit­i­cal in­ter­fer­ence.

Dur­ing the bit­ter pres­i­den­tial cam­paign, Mr Trump crit­i­cised the Fed and Ms Yellen for keep­ing rates low to help Pres­i­dent Barack Obama, while some Repub­li­cans in Congress are push­ing for re­form of the Fed.

That has raised con­cerns that Fed ap­point­ments could be­come politi­cised in a Trump ad­min­is­tra­tion: Ms Yellen’s term as Fed chair ends in Fe­bru­ary 2018, and there are two va­cant seats on the board.

Mr Fis­cher stressed the im­por­tance of “keep­ing a very at­trac­tive pol­icy in­stru­ment ... out of po­lit­i­cal hands,” as well as hav­ing a pol­icy process that is op­er­at­ing out­side the po­lit­i­cal cy­cle.

In ad­di­tion, he warned against for­get­ting the lessons of the fi­nan­cial cri­sis and rolling back reg­u­la­tions put in place to try to pre­vent a re­peat.

“We’ve changed the be­hav­iour of the fi­nan­cial sys­tem. We’d bet­ter pre­serve that or we are invit­ing fi­nan­cial trou­bles,” Mr Fis­cher said of rules that have in­creased bank cap­i­tal to make them more re­silient and changed be­hav­iour in de­riv­a­tives mar­kets.

The cri­sis was caused by “bad be­hav­iour, bad strat­egy” in the fi­nan­cial sec­tor and “we can’t al­low our­selves to for­get that”, he said.

Mr Trump ap­pears to favour rolling back the Dodd-Frank reg­u­la­tions to loosen re­stric­tions on banks. En­acted in 2010, the sweep­ing reg­u­la­tory re­form pack­age aimed to pre­vent a re­peat of the 2008 fi­nan­cial cri­sis and the cas­cad­ing fail­ures of fi­nan­cial in­sti­tu­tions that led to the Great Re­ces­sion. –

Photo: AFP

Stan­ley Fis­cher is against the Fed be­ing politi­cised.

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