A One-On-One with Fed's Stanley Fischer

Mr Vis Chrema, thank you so much for joining Bloomberg this morning. I want to bring up a chart which I think goes back and we like to do this with anybody of your stature. Can we go back to nineteen sixty nine in a chart that Mrs Fisher made in your thesis at M I T. I have no idea what this chart is. It's from your original thesis of the X y Z space on contingent commodities. Whatever

that chart is, it's in the textbooks. It's in your classic textbook dorn Bush Fisher Stars is the economics of today in the textbook or in that thesis of n Well. The basic, the basic economics hasn't changed that much. The sort of understanding of what the fundamental forces in the macro economy are hasn't changed that much, but what those forces are have changed a lot over time, and we're operating in a much more globally integrated not fully integrated

by any means, uh economy. By the way, I don't recall doing that chart, but you say in your notes that Mrs Fisher did that chart for you a few years ago. I'd be surprised. But if that's what it is, what is the next chairman and the committee as a whole, the Federal Open Market Committee? What type of economics do they have to do? May I suggest that it needs to be a more malleable economics. Yes, it's not as simple as it used to be, and you've got to

take more forces and more changes into into account. With us being very close to a global globally integrated economy. Are Michael McKee was talking about you teaching at m I T with Chairman Bernankey as a student, with President drag as a student as well. How would you teach the PhDs today? Would you teach them differently than you taught Bernanke and drag well as just saying that science proceeds,

uh progress as funeral by funerals. So I think I'd be teaching more or less the same things, and the next generation would have something more more advanced, more different than I would have had. Let me dive into the economics today. You spoke to the Economic Club of New York in October of a bit ago. Uh and it was about ultra accommodative. I'm going to say that Stanley

Fisher gave us this phrase, alter commendator. Bring up the chart in New York if you would, And this is a terrific chart of the inflation adjusted FED Funds target rate, and we still haven't gotten back to the zero level the yellow circles. You're Economic Club of New York speech. Are you happy with the pace that we're on to get back to a normal FED Well, I'd rather that the real interest rate became positive, which we expect to happen sometime in mid two thousand and eighteen. Uh So

the pace is okay, it's not terrific. But this is a very complex issue which is related to the decline in productivity growth, among other things, and it's related also to decisions that the government would make. The real interest rate rose quite a bit when it was expected that there be a big fiscal stimulus, and it went down off towards when the expectation of the stimulus was reduced. Expectation is an important word across all of Stanley Fisher Economics.

Good morning to professor Lucas of Chicago, and of course you taught at Chicago years ago. Are we expecting too much in our guestimates of inflation? Do we have too much of a belief that we will have a higher inflation? Well, I still believe we will have higher inflation. Sort of. There are basic mechanisms, and the basic mechanism hereas where unemployment is declining all the time, wages will start going

up at some stage. And the experience many of us have, including myself, is you have to wait a long time, usually longer than you expected to wait for something to happen. But then if it's a very basic force, namely increase in employment increasing wages, it will show up. And ones that shows up, we will say, oh, yeah, that's what

we expected. I spoke to our Bloomberg Economics team about what to speak de Vice Chairman Fisher about and there's so much uncertainty about the future of this important global institution, the Federal Reserve System. Let's start with the idea of a low rate psychology. The joke is low rate Janet, with great respect to the chair. The reality is we have low rate Donald. We have a president who seems

to be wired for the comfort of low rates. Is that a mistake, Well, there are reasons to want low rates, especially when growth is so slow. An investment has been smaller than expected for quite some time, So low rates are to encourage investment or to encourage growth. They have been less successful in that than we expected, but they've been very successful and encouraging employment. And the miracle of thiscovery is that it did not generate that the crisis

did not generate long term massive unemployment. We're basically back to something close to full employment. I would ask your mentor,

Paul Simelson, who should be the next FED chair. Won't do that with you about the politics of this person or that person, but it's obviously a critical appointment to have a new chairman explain to the American public how the new chairman or chair will be different from what we've seen in previous leaders of our fed Oh, this is a choice clearly of the president and the administration, and uh, that's decision is up to them. They are

candidates whose names are in the newspapers. You don't know how important are and it's really not appropriate for for me to get into deciding who's going to be the next chairman. I would suggest that's probably true. Maybe I disagreement. Brendan Murray would disagree with you and want to know name,

rank and serial number. But the basic idea here of if we have the turmoil we have in America and the economic uncertainty in our theories, will that migrate us towards a more rule based system and away from discretion over the coming years. I think the attraction of a

rule based system is very large. I think that in practice you'd find yourself having to define all the time when it's appropriate to diverge from the rule, because the rules do not anticipate the many strange things that can happen in an economy, even such things as three hurricanes in a row, which is not a huge surprise, but it happened, and it changes policy, and the many other things that will change policy. So I think rules are a good guideline to the basic pot you're taking. Where

are you trying to go? But I wouldn't run monetary policy on the basis of rules where you strictly go down, look at this equation, say that's it, and let's get rid of the central bank. I believe you're in Zambia years ago. In your first book was Maynard Keynes oft six. Do we need a FED chair like Chair Yellen, who has read Maynard Keynesty six. I believe we have a number of candidates that probably haven't even gone through those

few key chapters which are considered the cannon today. They should read it, and they should read the whole book because at the end of the general theory Knes as a chapter on what happens when the interest rate gets too low? And it's it's worth reading even today. What's in there? Can we have a new set up with someone like William Miller of Pastimes in places, a non monetary FED chair who has a vice chair of your capabilities or Chair Yelling's capabilities, Or do we need to

have that monetary expertise for crisis and shock as chairman? Well, I've I've found in my terms in one place as governor in another's as vice chair that having the basic economic theory, theoretical knowledge and experience increases your self confidence about what you're doing. Uh. Is it essential? I doubt that there are very smart people who could figure this out in many ways. But is it helpful? Yes? Very much like in a four standard deviation shock, you enjoyed.

You enjoyed the financial crisis, and you've enjoyed the struggles forward here for the next chairman, whether it's Kevin Wars or it's again chair yelling uh to be reappointed. Uh. Many people talking about that. What is the difference of people like you in a worse standard deviation shock of the moment or set of shocks versus a normal day at the eCos building. Well, the difference is is there something that you ought to do or should you let

the markets take care of it? And if you decide to leave it to the markets, sort of wait a week and see what it really means. Uh. Those are things which depend a great deal on the experience you have, on your understanding of how the markets work, and that you get over the years. Uh. And I've sort of the initial to take a simple example, the initial reaction of people who haven't thought, is something bad happens you've

closed the markets, that's terrible. In your final thoughts in London and your speech of the other day, wonderful speech sort of on the tapestry and history of the Bank of England, you talked about never say never events. What kind of chairman do we need to be stealed and ready for never say never events? You simply need someone who has the flexibility of mind to see that that he or she needs to take a different route at a particular moment in time or over the next year

or two. And uh someone who has also the capacity to lead a very large, very complex committee, the Open Market Committee, to do the to agree with with his or thoughts. It seems like you just described John Taylor, but I won't put you in the trap of talking about Professor Taylor of Stanford or any of the other

good candidates that we have involved here. I think the arch question, and particularly for the Bloomberg world, is is Peter orzeg would say out of else that we have glide passed, that we have paths of stability as we move forward, and then we have these exogenous shocks and we have jump conditions. Do you have confidence that the two strategies of rate moves and balance sheet can be done over smooth glide pass that can be controlled by the institutional forces we have, or do we need to

be steeled for jump conditions to come. Well, we always need to be steeled for the possibility that we need to change course drastically. Uh. In October two thousand and eight, the Fed changed course drastically. That was obviously the thing to do after the financial crisis began to develop. So you have to waite, watch and wait, and I hope you can stay on those smooth paths, but never believe yourself that you can stay on those pots forever. You can't.

It is unimaginable to think of you retired. Do we get another edition of Dornbush Fisher Stars, I don't. I don't know at this at this stage. Very good, Vice Chairman Fisher, Thank you so much, Stanley Fisher. He is a vice chairman of the federals Are System. YEA. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform

you prefer. I'm on Twitter at Tom Keene David Gura is at David Gura Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio