Fed’s Fischer all for government spending
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. –
Stanley Fischer is against the Fed being politicised.