Everyone’s talking about Stanley Fischer, the former Bank of Israel governor and IMF managing director who has been
reportedly recruitedby the White House to be the next Vice Chair of the Federal Reserve.
Economists are overwhelmingly in favour of the choice as he is credited for effectively steering the Israeli economy through the financial crisis.
So, what do we know about Fischer.
Goldman Sachs’ Jan Hatzius and Kris Dawsey have a report structured as a Q&A. Here are the two questions regarding Fischer’s views on monetary policy:
Q. What are his views on balance sheet policy?
Fischer generally holds a favourable view on the effectiveness of balance sheet policy. As noted, the Bank of Israel began a program of longer-dated securities purchases under his watch. He also stated in a November speech at the IMF that one of the key lessons from the financial crisis, in his view, was that monetary policy is not impotent once the zero lower bound on short-term interest rates has been hit. He specifically highlighted the efficacy of the Fed’s QE―which he said was supported by a substantial amount of academic work―and did not explicitly mention forward guidance on the path of short-term interest rates.
In other words, Fischer is not shy about loose and easy monetary policy.
What about forward guidance? This topic was a bit more interesting. (Emphasis added)
Q. What does he think about forward guidance?
In contrast to his statements on QE, he has recently expressed a more sceptical view of forward guidance. Specifically, he noted in September that “if you give too much forward guidance you do take away flexibility,” that “we don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise,” and that “you can’t expect the Fed to spell out what it’s going to do…because it doesn’t know.” These statements contrast with Yellen’s strong endorsement of forward guidance. In that sense, Fischer’s statements do pose at least some risk to our expectation that the FOMC will ultimately enhance its forward guidance by reducing the unemployment threshold to 6.0%. That said, such a limited number of statements are unlikely to capture all of the nuances of Fischer’s thinking on the topic. One can also argue that his criticisms apply mostly to calendar-based guidance and less to outcome-based guidance, which only requires the Fed to “spell out what it’s going to do” in a more conditional sense. In any case, we have little doubt that Yellen and Fischer would see eye to eye on the need to prevent a large tightening of financial conditions anytime soon, so the slightly greater uncertainty that might result from his nomination is mainly about tactics, not strategy.
Forward guidance is becoming a hot topic lately as it appears it will become a more important policy tool as the Fed eventually tapers and ends quantitative easing.
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