WSJ interview with Richard Fischer, President of Dallas Fed.
He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China."
He returns to events on his recent trip to Asia, which besides China included stops in Japan, Hong Kong, Singapore and Korea. "I wasn't asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States. That seems to be the issue people are most worried about."
He returns to events on his recent trip to Asia, which besides China included stops in Japan, Hong Kong, Singapore and Korea. "I wasn't asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States. That seems to be the issue people are most worried about."
This is a clear sign that foreign investors are worried that the Fed will use the time-tested solution to big deficits, inflate The economy may not inflate today or this year, but for a holding of 10-year Treasuries there is a demand for an inflation premium. Unfortunately, there is no way out of his situation without a dismantling of the source of the problem, deficit.
Donald Kohn Vice Chairman of the Fed at Princeton University:
"To ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures," he said.
The Fed has said it is willing to expand extensive purchases of mortgage-related and longer-term Treasury securities to support any nascent recovery.
"The preliminary evidence suggests that our program so far has worked," Kohn said referring to the commitments to buy securities to date.
Kohn said government spending is likely to have a more powerful effect in helping pull the economy out of recession now -- with interest rates near zero -- than it would if the Fed were still in a position to lower interest rates further.
"In this situation, fiscal stimulus could lead to a considerably smaller increase in long-term interest rates and the foreign exchange value of the dollar, and to smaller decreases in asset prices, than under more normal circumstances," he added.
The most important point in the Kohn comments is that the Fed needs a framework for managing its balance sheet. What, it does not have a plan? The only hope is that the multiplier will be higher so that we will grow our way out of this depression. There is little evidence for the high multiplier. We did not see it in Japan. There may be an inflation problem not because this is the plan but because the Fed may not be able to manage its balance sheet.
The most important point in the Kohn comments is that the Fed needs a framework for managing its balance sheet. What, it does not have a plan? The only hope is that the multiplier will be higher so that we will grow our way out of this depression. There is little evidence for the high multiplier. We did not see it in Japan. There may be an inflation problem not because this is the plan but because the Fed may not be able to manage its balance sheet.
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