Stanley Fischer Speaks Out

Can central bankers succeed in getting global economy back on Track?

“Year after year, we have had to explain from mid-year onwards why the global growth rate has been lower than predicted as little as two quarters back. … This pattern of disappointment and downward revision sets up the first, and the basic, challenge on the list of issues policymakers face in moving ahead: restoring growth, if that is possible.” - Stanley Fischer, (8/11/14) in his first speech as vice chairman, Federal Reserve

MK comment:  Though the raging bull grips Wall Street, the rest of the economy languishes. The gold price — paper bound — reacts to non-existent economic strength which market players believe will force interest rates higher.  Economic reality, to make a long story short, tells a different story.  If you want to know why Janet Yellen and the Fed are unlikely to raise interest rates any time soon, take the following into account:

1.  The following graph first-posted here by our resident economist, Pete Grant, has a lost gem of an understanding hidden in full sight.  Can you see it?

Every time the Fed raises rates, it causes a recession (the gray bars).  In this disinflationary environment (the one that began in 2008) raising rates would be economic suicide — and the effects would be widespread, monumental, and too deep and numerous to list here.

All of which leads me to number two. . . . .

2.  The Federal Reserve Board is a hot bed of politics — especially for those who take every utterance from its members to be a form of economic gospel requiring a full market reaction. It is easy for Board members to talk like hawks when they know that the chair(wo)man is unlikely to succumb to their rhetorical positioning.  Put those same individuals in charge of the Fed and make them fully responsible for the economy and then let’s see whether or not their acts follow the rhetoric.  The indelible legacy of Alan Greenspan is that even the most conservative among central bankers can go suddenly dovish when the reality of full responsibility for economic policy hits home.  Better to be safe than sorry. . . .

Stanley Fischer’s comments, unambiguous as they are, might appear to be an act of courage at this juncture, but they might also constitute the dropping of a less than subtle hint. With respect to the gold market, it spells out a message that even the knee-jerk speculators in paper gold might be forced to take into account.  If Fischer represents the hawkish position at some level, one would have to assume that the Fed’s hawks might be ready to sound the retreat.

This quote from Kaletsky’s Reuters column speaks volumes:

“The central message of Fischer’s speech — that central bankers and governments should try even harder than they have in the past five years to support economic growth — was closely echoed by Mark Carney, the governor of the Bank of England, at his quarterly press conference two days later.

This consistency should not be surprising: Carney was Fischer’s student at the Massachusetts Institute of Technology in the 1970s — as, even more significant, was Mario Draghi, president of the European Central Bank. Because of Fischer’s influence on other central bankers, as well as his unparalleled combination of academic and official experience, he is probably now the world’s most influential economist.”

Is this a game changer?  Maybe so. Concerns about pushing on a string will resurface, but if Fischer is at the vanguard issuing a clarion call, it is bound to affect the flow of capital in the financial markets and blunt concerns about rising interest rates -- and maybe  that is Fischer's and the Fed's intent . . . . . .Something to ponder during a restless weekend toward the end of summer doldrums.

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Michael J. Kosares is the founder of USAGOLD and the author of “The ABCs of Gold Investing – How To Protect and Build Your Wealth With Gold.” He has over forty years’ experience in the physical gold business. He is also the editor of Review & Outlook, the firm’s newsletter.