Today will bring the minutes from the FOMC meetingand possibly some clarity over their decision to embark on quantitative easing. However, we already have one Federal Reserve member keepin' real and telling us how he sees it.
In a speech to a private Japanese think tank, Dallas Federal Reserve President and FOMC voting member Richard Fisher said that the U.S. economy is grim, and the Federal Reserve is "duty bound to apply every tool" to clean up the financial system and clear a path for a return to sustainable growth. In short order, he sees the U.S. unemployment rate going to 10% in 2009, he believes easy monetary policy alone is not enough for U.S. growth, and he thinks fiscal policy is critical to bolster the U.S. economy.
Although the Fed has run up its balance sheet dramatically and will do so further based on its current commitments, Fisher said fears that dollar-based fixed-income portfolios would be debased have been "unfounded" so far according to Reuters. "The problems facing the largest competitive currency, the euro, are perhaps even more substantial than those confronting the United States." This last comment made the currency markets dance and sing as they sold the Euro against most major currencies.
But Fisher went further to post this advice to the Obama administration, "The trick to fiscal policy is to provide the spark, to provide the right incentives, get the small and medium-sized firms create jobs again, create dynamism in the economy without planting the seeds of inflation."
Fisher wasn't the only Fed member commenting this week or offering advice. Governor Kevin Warsh gave a speech entitled the Panic of 2008that details his belief that the financial crisis is a panic on top of a recession. Disturbing as that may sound, he did offer solutions for the situation.
"The Panic began before the recession and will assuredly end before it. Getting the financial intermediation process to function with greater efficacy--even before a new financial architecture is firmly established--is a necessary condition to a sustained recovery....Financial stability demands policy stability. The official sector's policy preferences must be communicated clearly, credibly, and consistently and backed by concrete action."
"To accelerate the formation of a new financial architecture, the official sector should outline and defend a positive vision for financial firms and welcome private capital's return. The nature and terms of the relationship between financial firms and the official sector should not be left in limbo. Finally, and perhaps most important, policymakers across the government must be ever mindful of the long-term consequences of their actions."
While the Federal Reserve has come under scrutiny for its actions during the crisis from members of Congress, they are now clearly pushing back. Fisher and Warsh both warn Congress on over spending and the risk of debasing US dollar fixed-income portfolios (US Treasuries). Warsh takes the Obama administration and Congressional leaders to task over negative comments on banks and financial firms.
Reading between the lines, I see the Federal Reserve advocating the US political leadership to focus their attention first on fixing the financial system, second on enacting a budget that stimulates and is efficient, and third leaving the finger pointing until the economy turns around.
Maybe after everyone in DC gets back from their trips, they'll listen.