On Tuesday evening Federal Reserve Bank of Dallas President Richard Fischer, a non-voting alternate member of Federal Open Market Committee (FOMC) known for his hawkish stand against the Fed’s loose monetary policy of quantitative easing, spoke from Toronto, Canada before the C.D. Howe Institute Directors’ Dinner.
Investors worldwide are increasingly on edge listening attentively to public remarks from Fed members to gain a directional sense about where the Fed Reserve is headed during their upcoming FOMC meeting on June 18-19th with their massive $ 85 billion a month bond buying program, known as quantitative easing (QE3), consisting of $40 billion in mortgage backed securities and $45 billion in longer-term Treasury securities which Fed Chairman Bernanke pledged to continue as long as the U.S. jobless rate remains above 6.5% and inflation remains below the 2 percent target.
During the Tuesday evening speech from Toronto, Fischer admitted that the issue of the moment is not a meaningful threat to price stability from the Fed’s current monetary policy.
“The issue is job creation” he said.
The target of Fischer’s criticism for the slow creation of U.S. jobs rests squarely with politicians in Washington D.C. responsible for creating fiscal policy.
In his speech, Fischer admitted that U.S. fiscal policy is inhibiting the transmission of monetary policy into robust job creation.
“Until the Congress and the president provide a clear road map to restoring fiscal rectitude, economic growth will continue to be impeded by undue uncertainty about future tax rates, future government purchases, future retiree benefits and all manner of factors that prevent the U.S. from achieving its long-run potential” Fischer said.
Later in the speech, Fischer became even more blunt when he argued that the Federal Reserve has little chance to move the economy to full employment unless government leaders can work together to support economic growth.
“I argue that the Fed has no hope of moving the economy to full employment, despite having pulled out all the stops on the monetary front, unless our fiscal authorities get their act together” Fischer said.
Fischer gave specific recommendations about the types of fiscal policy changes that are in high demand on Capitol Hill to help stimulate growth in the U.S. economy, namely in the areas of the outdated U.S. tax code and its opaque regulatory environment.
“Those economic agents with the wherewithal to expand payrolls and put the American people back to work must have confidence that our fiscal authorities and regulation makers—the legislative and the executive—will reorganize the tax code, spending habits and the regulatory regime so that the cheap and abundant money we at the Fed have made available to invest in job-creating capital expansion in the United States is put to use. Until then, I argue that the Fed is, at best, pushing on a string and, at worst, building up kindling for speculation and, eventually, a massive shipboard fire of inflation” Fischer said.
During the U.S. presidential election last November, President Obama and Republican candidate Mitt Romney both spoke about the need to lower the corporate tax rate and close tax loopholes that permit corporations and the wealthiest Americans to avoid paying U.S. taxes.
Obama proposed lowering the corporate tax rate to 28 percent from the current 35 percent top corporate rate while establishing a minimum tax on multinational corporations’ foreign earnings.
Mitt Romney proposed lowering the corporate tax rate to 25 percent and switching from taxing worldwide income to a territorial based tax system.
Despite the campaign tax reform proposals, little progress has made on Capitol Hill to reform the corporate tax code.
On May 21st Apple CEO Tim Cook testified before the Senate Permanent Subcommittee on Investigations about Apple’s role in taking advantage of tax loopholes in the U.S. corporate tax code to park over $100 billion offshore.
The grilling of CEO Tim Cook by Senate leaders exposed the public to tax loophole vulnerabilities that linger from retaining the U.S. corporate tax code.
Apple and a host of wealthy U.S. corporations are requesting a reformation of the corporate tax reform to create a greater incentive to re-allocate their billions in corporate profits back to the U.S.
Fisher On QE3
Fischer spoke about the need for a reduction in the Fed’s monthly $ 85 billion bond buying program while admitting that the 30 year rally in bonds is over.
“We cannot live in fear that gee whiz the market is going to be unhappy that we are not giving them more monetary cocaine” Fischer said.
“It would be prudent to dial back the rate of purchases we are making in mortgage-backed securities now that the housing market is in a good state, construction has started again, housing prices are appreciating significantly” Fischer told reporters.
On Tuesday Kansas City Fed President Esther George, a voting member of the FOMC, unlike Fed Reserve Bank of Dallas President Richard Fisher, released in a statement from New Mexico the following message:
“Waiting too long to acknowledge the economy’s progress and prepare markets for more normal policy settings carries no less risk than tightening too soon.”
* Correction: The last post from Sunday contained an inaccurate calendar date for the release of vehicle sales. It was inaccurately listed as occurring on Tuesday instead of Monday, the correct date that vehicles sales was released to the market.