Federal Reserve

Fed's Fisher: Forward guidance should not be binding


The U.S. Federal Reserve must avoid being locked into calendar-based policy commitments and instead ensure its forward guidance is flexible enough to allow it to respond to changing conditions, a top Fed official said in Hong Kong on Friday.

Dallas Federal Reserve Bank President Richard Fisher said he worried that predictable commitments were unsound policy as they could lead to false complacency and market instability.

"I question if it is sound policy to remove all uncertainty or volatility from the market," Fisher, a voting member of the Federal Open Market Committee (FOMC), said in a speech at the Asia Society in Hong Kong.

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The market's sensitivity to the Fed's timing forecasts was in full view last month. Stock, bond, and currency markets were hit hard by comments from Fed Chair Janet Yellen that an interest rate hike could follow around six months after the central bank ends its bond-buying stimulus, earlier than investors had expected.

Richard Fisher, president of the Federal Reserve Bank of Dallas.
Jim Stern | Bloomberg | Getty Images

"At its worst, I fear calendar-based commitments can lead, perversely, to market instability by encouraging markets to overshoot, as they appear to be doing in some quarters at present," Fisher said.

No commitments

Yellen, like her predecessor Ben Bernanke, has offered the markets forward guidance on policy to try to help people understand the direction and thinking of the Fed.

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"Those who think we can be more specific in stating our intentions and broadcasting our every next move with complete certainty are, in my opinion, clinging to the myth that economics is a hard science," Fisher said.

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Fisher said markets and investors often sought to infer specific dates and targets from guidance, even though the Fed was only explaining its thinking without making any promises.

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"The FOMC is seeking to make sure that we have a sustained recovery without giving rise to inflation or market instability. We will conduct monetary policy accordingly," Fisher said.

"Regardless of the way we may finally agree at the FOMC to write it out or have Chair Yellen explain it at a press conference, we really cannot say more than that."

The Fed is currently winding down its quantitative easing, massive asset purchases that pump money into the economy. Monthly bond buying has been cut from $85 billion to $55 billion per month, a figure which Fisher, a long-time policy hawk, said was "still somewhat promiscuous."

He said based on the current pace of the taper, the Fed's quantitative easing would end in October.

By Reuters