Actions taken by the Federal Reserve will facilitate and, indeed, expedite the recovery process, a top Fed official said Thursday. Federal Reserve Bank of Dallas President Richard W. Fisher spoke at Tsinghua University in Beijing, China in order to address the global impact of the United State's response to the financial crisis. He offered a gloomy view, stating that the American economy (is) in stasis.
However, Fisher's longer-term outlook was bright, and he said that actions taken by the Federal Reserve will serve not only the interests of the United States but also those of China.
In prepared remarks, Fisher predicted that the unemployment rate in the United States, currently at 8.5 percent, will surpass 10 percent by the end of 2009. As far as continuing contraction in GDP, Fisher predicted that the economy will have contracted at a dispiriting rate in the second quarter.
As Americans and businesses shore up to weather the recession, assuming a defensive stance that is further harming the economy.
The result is an American economy in stasis, Fisher said. Presently, nothing is being ventured, and nothing is being gained.
The Dallas Fed President noted the bevy actions of the Federal Reserve in order to boost lending and assist the economy in the midst of complex, trying times.
We are the central bank of the largest economy in the world, and we are duty bound to apply every tool we can to clean up the mess that our financial system has become and get back on the track of sustainable economic growth with price stability, Fisher said.
He addressed two of the concerns associated with the expansion of the Fed's balance sheet in order to boost liquidity and support bank stabilization, namely the risk of future inflation and negative effects on the dollar.
Addressing the inflation issue, Fisher noted his reputation as one of the most hawkish members of the Fed. Still, even as a hawk who despises inflation, Fisher said that the expanded balance sheet is necessary.
It is clear to me that in this environment, inflation is unlikely to present a serious threat given the pervasive bias in the U.S. economy toward wage cuts and freezes, rising unemployment, the widespread loss in wealth that has resulted from both the housing and equity market corrections, continually declining consumption and business investment, and the anemic condition of the banking and credit system, all of which reinforce downside price pressures in a global economy groaning with excess capacity, Fisher said.
He added that the For as far ahead as I trust my forecasting ability.the problem with regard to maintaining price stability most certainly is not inflation.
In terms of the dollar, Fisher recognized the worry of the Chinese associated with a potential decline in the value of the dollar.
With regard to the fate of the dollar and the willingness of others to continue purchasing dollar-denominated debt, we realize that by purchasing Treasuries in volumes and of durations that are atypical, we are at risk of being perceived as monetizing the fiscal largesse of our Congress, Fisher said. And we are acutely aware that by intervening in the mortgage-backed securities and other markets that we are at risk of being perceived as blurring the lines between fiscal and monetary policy.
We realize that this may give rise to some apprehension among large holders of Treasuries and agency paper such as your government and others in the Asian-Pacific region, he continued. And yet, let me remind you that over the past year since we began in earnest the process of using the new tools I have just articulated, the dollar has appreciated 17 percent against the euro and 29 percent against the British pound.
In order to maintain its ability to promote price stability and faith in the dollar, Fisher emphasized the importance of the Fed remaining independent.
Of course, to maintain price stability and faith in the dollar, we must maintain the independence of our central bank, the Federal Reserve, he stressed.
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