Fed Helps Banks, Skips Over Consumers

Don’t count Dallas Fed President Richard Fisher among those economists who love the Federal Reserve’s ongoing policy of low interest rates. Banks make out like kings, he admits, but savers? Not so much. And that will hurt the economy more than it helps, he contends.

Fisher’s comments come from a Nov. 8 speech to the Association for Financial Professionals In San Antonio. In it, The Dallas Fed chief argues against the Fed’s interest rate policy.

"Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand," he said. Fisher says that low rates have yet to spur hiring or lending to small businesses – two tasks that are at the top of the list as drivers for a booming economy. "It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers," he said.

Fisher says that banks have accumulated a mountain of cash, with more than $1 trillion in reserves, but they’re still not lending. What’s more, the recent move by the Fed to pump $600 billion into the U.S. bond market is a risky move that may hurt more than help the economy.

Fisher says that the $600 billion gambit – dubbed “QE 2” by the financial press (for a second round of “quantitative easing”) is fraught with risk.

"I could not state with conviction that purchasing another several hundred billion dollars of Treasuries — on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities — would lead to job creation and final-demand-spurring behavior," he said. "But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed."

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