Over the last couple years I've been watching the globalization research of Richard Fisher and his team at the Federal Reserve Bank of Dallas. So I was especially interested to see on Tuesday that Fisher, for the second Fed meeting in a row, dissented from the FOMC 75 basis-point rate cut, preferring "less aggressive action." Charles Plosser of the Philly Fed joined Fisher's dissent. This was a clear signal there is more strong-dollar, anti-inflation fight at the FOMC than the market had realized. For months the Fed's weak-dollar helicopter currency drops had scared Wall Street into panic and, finally, Bear Stearns close to bankruptcy. Fisher's dissents, however, seem to have been the key factor that helped stabilize the dollar, boost the sagging equity markets, and bring oil and commodity prices down from record-highs.
Fisher has been a key figure in expanding global trade. As deputy U.S. Trade Representative in the late 1990s, he implemented NAFTA, worked on agreements with Vietnam, Singapore, Korea, Japan, and Chile, and negotiated China and Taiwan's ascension into the WTO.
But recently he's come to believe that economics has not kept up with world-wide trade and global communications. He created the Globalization and Monetary Policy Institute within the Dallas Fed to study these issues. Just a week ago at an international trade and monetary meeting in France he said monetary economics has not caught up with globalization:
Globalization means that we can no longer guide policy by ignoring trade and capital flows or the invisible but nonetheless effective links between countries that have been forged through cyberspace. Yet it appears to me that the default framework for thinking about monetary policy continues to be the closed-economy model.
This was Robert Mundell's critique almost 50 years ago, and the source of his Nobel prize winning international economic models. Yet for all the talk of globalization, many economists and policy makers still persist in their overly rigid view of national boundaries, national economies, and domestic tax and monetary policies. They pretend that we can have a global economy with trade, capital flows, and real-time communication on the one hand but that somehow we can simultaneously raise tax rates, regulate new industries, or engage in activist strong-dollar or weak-dollar monetary policy without suffering quick and dramatic competitive consequences on the world stage.
Though he is still grappling with the complexities (aren't we all), Fisher's view seems to be that there can be no such thing as a narrowly domestic monetary policy, especially if your currency is the reserve money of the globe. These instincts have served him well.
Fisher was the first Fed official to admit that monetary policy in 2003-04 (before his tenure) was far too loose.
In an apparent and rare in-house critique, the president of the Federal Reserve Bank of Dallas said that because of faulty inflation data, the Fed kept interest rates too low for too long earlier this decade, fueling speculative housing activity.
A number of critics have said the Fed under former chairman Alan Greenspan kept monetary policy too easy from 2003 to 2004. But Richard Fisher's remarks to the New York Association for Business Economics yesterday mark the first time some Fed watchers could recall a sitting Fed policy maker making such comments.
"In retrospect, the real Fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been," Mr. Fisher said.
I noted Fisher's candid critique at the time , and The Wall Street Journal followed up with an editorial called "The Fed's Confession":
Mr. Fisher blamed this mistake on "poor data" that underestimated inflation, leading "to a policy action that amplified speculative activity in the housing and other markets. Today, as anybody not from the former planet of Pluto knows, the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country." In other words, the Fed itself is responsible for the current housing bust because its over-easy policy created a real estate frenzy that was bound to end once the Fed tried to regain control over inflation expectations.
No doubt the Fed's self-inflicted wounds have put it in a tough spot, trying to relieve the housing bust without igniting inflation. But Fisher more than most understands the importance of avoiding the wild interest rate and currency swings in the first place:
In todayâ€™s world, where investors can move their funds instantly from one currency to another to avoid depreciation, the price central bankers pay for high inflation is much higher than in the past. Understanding this, you can see why I am a steadfast inflation-fighting owl.
Fisher's foresight on the global nature of the dollar and his dissenting independence this Tuesday helped end Wall Street's all-out panic. Let's hope his views on trade and the dollar get a wider hearing so we don't have to endure these closed-economy monetary hijnks again.