One of the participants at the dinner had also been present at the Federal Reserves annual symposium in August at Jackson Hole, Wyoming. Mole reported that Bernanke was now wildly unpopular with his central bank colleagues, especially those from the emerging markets. These central bankers perceive the Feds infatuation with indefinite QE as a recipe for disaster. A weaker dollar means stronger emerging market currencies, which in turn makes exports more expensive. A weaker dollar also increases the price of key commodities such as oil and grains, and this makes for a febrile political environment as the poor suffer more.
I reflected on this anecdote when I read a fascinating speech that Richard Fisher, the hawkish president of the Federal Reserve Bank of Dallas, made at the Harvard Club in Manhattan on September 19. Fisher gave his perspective on the FOMCs recent decision to embark on a new round of quantitative easing focused on mortgage-backed securities. The speech is brilliant but trenchant. Early on Fisher throws down the gauntlet: "I believe that with each programme we undertake... we are sailing deeper into uncharted waters... Nobody on the committee, nor on our staffs at the boards of governors and the 12 banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody in fact no central bank anywhere on the planet has the experience of successfully navigating a return home from the place in which we now find ourselves."
Fisher then undertakes a masterly summary of the Feds dual mandate as well as the results of his own research on the conditions that US businesses are experiencing and whether or not a more accommodative monetary policy would lead to increased investment and employment. "The responses of those I surveyed," he barks, "are best summarized by one of the most highly respected CEOs in the country: We are in stall mode, stuck like Velcro, until the fog of uncertainty surrounding fiscal policy and the debacle in Europe lifts. In the meantime, anything further monetary accommodation induces in the form of cheaper capital will go to buying back our stock." Fisher ends with unconcealed disdain for the current ineffectual Congress. "The FOMC is doing everything it can to encourage the US economy to steam forward... If only the fiscal authorities could do the same! Instead, they fight, bicker and do nothing but sail about aimlessly... I am tempted to draw upon the hackneyed comparison that likens our dissolute Congress to drunken sailors. But patriots among you might take umbrage, noting that a comparison with Congress in this case might be deemed an insult to drunken sailors." Might Fisher be a candidate to replace Bernanke as Fed chairman, if Mitt Romney wins? For me, that would be an exciting outcome. Fisher seems to have an excellent sense of humour. In any event, his Harvard Club speech will undoubtedly enter the history books as a reference point for how confused academics and policymakers were during this great QE experiment.