If the economic brainpower at the U.S. Federal Reserve – made up of 19 bank presidents and board governors taken from the faculties of the best universities and the board rooms of the largest banks in the nation – does not impress you enough, you can soon add to that collection of walking computers a Dr. Stanley Fischer – nominated to replace the Fed’s vice-chairmanship vacated by Janet Yellen when she takes the middle seat as chairwoman on February 1st.
Not to be confused with Richard W. Fisher, the current President of the Federal Reserve Bank of Dallas, Stanley Fischer will be joining a Federal Reserve in transition. After five years of ultra low interest rates, two massive injections of money known as quantitative easing, and over a year of monthly bond and mortgage purchases, the economy seems to be showing positive signs of recovery stable enough to be slowly weaned off of the Fed’s easy money milk.
But Dr. Fischer’s stellar track record as a man of quick decisive action at his previous post as head of Israel’s central bank may be more than the “take it slow and easy” U.S. central bank is prepared for. Might Fischer’s appointment be a signal that the Fed is getting ready to change course? Is the economy ready for that? More importantly to investors, are your portfolios ready for that?
To get our answers to those questions, we need to learn more about man’s stance toward monetary policy.
Mr. Stanley Fischer
Born and raised in Rhodesia, southern Africa (now Zambia and Zimbabwe), Dr. Fischer moved to England in his late teens to study at the London School of Economics, where he earned his B.Sc. and M.Sc. by 1966 at the age of 23, and then to the U.S. where he earned his Ph.D. at MIT by 1969.
Fischer’s academic career, first as an associate professor at the University of Chicago in the early 1970s and then as professor at the MIT Department of Economics from 1977-88, was distinguished by the writing of three popular economics textbooks on macroeconomics. He was thesis advisor to the current Federal Reserve Chairman Ben Bernanke when he was completing his Ph.D. studies at MIT, and he also taught current European Central Bank governor Mario Draghi.
Moving from teaching to banking, Fischer next served at the World Bank until 1990, at the International Monetary Fund from 1994-2001, Citigroup (NYSE: C) from 2001-05, and finally as Governor of the Bank of Israel from 2005-13.
Among Fischer’s many accomplishments as governor of Israel’s central bank was successfully steering the Israeli economy out of the 2008-09 global financial crisis, helping the Bank of Israel earn the 2010 IMD World Competitiveness Yearbook’s recognition as first among central banks for its efficient functioning.
His numerous accolades include grade “A” ratings on the Central Banker Report Card by Global Finance magazine for four consecutive years from 2009-12 and the Central Bank Governor of the Year award in 2010 by Euromoney magazine.
Fischer’s experience will be invaluable to the U.S. Federal Reserve, as he “has been involved in managing global financial crises since the Mexican crisis in the ’90s,” Edwin Truman, a former Fed official, extolled Fischer’s credentials to Bloomberg.
Decisive and Flexible – Shaking Up the Fed?
On the surface, Fischer’s joining the U.S. Federal Reserve may be expected to shake things up a little, since he believes in keeping oneself uncommitted to an extended pre-set course. He believes in responding quickly to an economy’s needs as they develop, requiring one to remain flexible, ready to act, unencumbered by any long-term policy promises.
In the past, he has spoken against a central bank’s offering too much forward guidance for too long a period of time, since such a long-term commitment handcuffs the bank from changing policy quickly as conditions change. This may be seen as creating a conflict with Fed Chair-elect Janet Yellen, who has spoken in favor of providing more forward guidance.
Fischer has also cautioned that stimulus and easy money policies for too long a period are “dangerous,” a view some might expect to clash with the decidedly dovish Federal Reserve’s preference for keeping interest rates ultra low for several years more.
But we must keep in mind that Fischer has repeatedly proven he is not afraid to be dovish in slashing interest rates and debasing the currency to increase export revenue before turning hawkish by returning interest rates back to normal – always at a speed the economy is ready for.
If used in proper measure for an appropriate length of time, Fischer has called highly accommodative easy money policies “necessary” to stimulate an economy by keeping the cost of money low and its availability high. What is more, he has even stated that there is “no limit” to how high a central bank’s balance sheet can grow through bond buying and pumping money into the economy.
So don’t expect the immediate termination of the Fed’s bond buying program or the raising of interest rates just because Fischer joins the board. What we can expect, though, is a stronger emphasis on letting economic data dictate policy instead of trying to talk the economy this way or that.
Less Guidance, Fewer Bubbles, Retraining the Markets
We can understand Fischer’s dislike of promising the markets a fixed course of action for an extended period of time, as too much forward guidance fuels asset bubbles by training traders and investors to pile into a market on the expectation of no changes in policy for years at a time, often ignoring economic data in favor of Fed promises.
By removing such forward guidance – or at least shortening its time horizon – uncertainty returns to the markets, forcing participants to think twice before committing themselves lock, stock, and barrel. This retrains the markets to pay attention to economic reports, since these will determine the central bank’s next moves – which can be anything when the bank is not committed to a pre-set course.
Yes, this does introduce a little volatility in the immediate term, but it prevents the catastrophic volatility you get from the bursting of a bubble that was allowed to grow and grow as promises overrode economic data for too long a time.
Investors to Remain Flexible
For investors, the addition of Fischer to the Federal Reserve Board of Governors does not necessarily mean interest rates are going to start rising soon and keep rising fast. Remember that as Governor of the Central Bank of Israel, Fischer slashed interest rates, bought up foreign currency, and crushed the value of the Israeli shekel like a stone to boost export revenue and lower the cost of capital to spur business expansion.
Only when the recovery was solid and was expected to continue on its own without central bank assistance was Fischer willing to start raising interest rates. Until such signs of a stable recovery are seen in the U.S., we will continue in this low interest rate environment even with Fischer in the second-tallest chair.
What we can expect from Fischer’s presence at the Fed is a leaning toward fast action on short notice. Investors must be nimble and ready to shift their positions on the fly in quick order as conditions change. Although this might introduce some volatility when the decisions are announced, it will prevent greater volatility down the road when too much forward guidance would force the Fed to play catch-up.
Yet even with Fischer’s preference for less-forward warning and quicker responses, we must appreciate he is one of seven members on the Fed’s Board of Governors and one of 19 voices speaking at Fed meetings. (Though a powerfully influential voice nonetheless.) Don’t expect a complete makeover at the Fed, just a slight pull away from committing to a fixed long term course and a little more toward remaining flexible and acting on short-term notice.
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