–Uncertainty About Taxes, Spending Hindering Business Spending
By Steven K. Beckner
RICHMOND, Va. (MNI) – The federal government’s looming fiscal
problems and the uncertainties they create are a major factor hindering
business spending, but the Federal Reserve needs to remain focused on
its long-run objectives and not try to offset projected “fiscal drag,”
Richmond Federal Reserve Bank President Jeffrey Lacker said Wednesday.
Lacker also spoke of the need for clearer communication by the
Fed’s policymaking Federal Open Market Committee — particularly when
the time comes to withdraw monetary stimulus — in an exclusive
interview with MNI.
He reiterated his dissatisfaction with the FOMC’s current use of a
calendar date to telegraph how long it intends to keep the federal funds
rate near zero, but warned against the pitfalls of “spurious precision”
in using economic indicators to convey the timeframe for monetary
firming.
Pre-election uncertainty about tax and spending policy is “very
much” a factor impeding economic growth, Lacker said, adding that, since
Spring “the commentary on this from our contacts has built up
substantially.”
“The way the debt ceiling got resolved in 2011 set up this set of
triggers that was supposed to force action (to reduce the budget
deficit) at the very end of this year,” he said. “So it all looks lined
up for something to get done at the very end of this year — either in
the Lame Duck (session of Congress) or early next year.”
Lacker said that artificial time table is having a profound affect
on decision-making.
“A lot of our business contacts are saying they have good ideas for
new projects, new products; they’re pretty confident about the market
for those, often exports,” he said. “But they’re very reluctant to make
a commitment because, given the policy outlook, they’re very uncertain
what their tax rates are going to be.”
“They’re also very uncertain about what their employment costs are
going to be — what’s going to get layered on in terms of health care
costs and other costs related to making a hiring commitment,” he said.
So Lacker said firms “are telling us it’s just impossible to do the
math, given the way everything is configured to try to encourage
Washington to make a decision by the end of the year.”
“So you can see why they’d say, ‘let’s just wait until Washington
sorts this all out,'” Lacker said.
The worst thing for the economy would be if Congress and the White
House decide to further delay deficit reduction, Lacker said.
“A significant concern about growth I have for the next year is
that, if Congress extends their deadline without resolving the
uncertainty about tax and fiscal policy, (the economy) could be left in
limbo with soggy growth and business investment without much momentum,”
he said.
Lacker said it is not necessarily higher tax rates but tax rate
uncertainty that is provoking anxiety in the business community of his
Fifth Fed district, which runs from Maryland through the Carolinas.
“What we’re hearing is that certainty is clearly the most important
thing,” he said. “‘It matters to us less what rate you choose; just
choose!'”
Fed Chairman Ben Bernanke and others have warned against reducing
the deficit too quickly lest it have a contractionary effect on the
economy. Lacker wasn’t so sure about that, saying he thinks that
“getting the transition (to lower deficits) over with and getting it
done fairly quickly has some advantages.”
But he said “the paramount thing is the longer run sustainability
of the trajectory our fiscal policy is on. We’ve got to get that
solved.”
Until the fiscal dilemma is licked, no one should expect to much
from monetary policy, Lacker cautioned.
The Richmond Fed chief, who has dissented all year against the
FOMC’s efforts to stimulate the economy through asset purchases and
extended “forward guidance” on the path of the federal funds rate, said
“people need to be reminded” that the Fed’s main purpose is to preserve
the purchasing power of the U.S. currency.
“We can mess up growth big time, but our ability to increase growth
is modest at best,” he said. “We shouldn’t be looked to as the main
driver of growth.”
Nor should the Fed stray into areas better left to Congress and the
White House — namely trying to boost housing activity. It is
“inappropriate” for the Fed to be buying mortgage backed securities for
that purpose, he said.
Fed critics have charged that the Fed is “monetizing” the federal
budget deficit. Even a few Fed officials have alleged that the Fed is,
at the very least, incentivizing delay in dealing with large deficits by
holding down interest rates year after year.
Lacker largely rejected such criticisms, but said the Fed must be
on guard against those perceptions.
“So far I think the widespread understanding is that the Fed is
conducting monetary policy solely from the point of view of what’s good
for the economy and without tilting or bending our policy in any way to
facilitate financing government deficits,” he said.
However, Lacker added, “we need to be careful about the perception
that we’re doing that or the perception that we’re going to be pressured
into doing that. That would be dangerous.”
“Monetary policy has to be focused first and foremost on its effect
on the economy and our objectives and the mission of price stability,”
he elaborated.
“The consequences for federal financing costs are just incidental,”
he insisted. “We need to keep that framework in place.”
Apart from not holding rates down to help the U.S. Treasury finance
the debt, Lacker cautioned that the Fed should not do so to offset any
deficit reduction that might be coming or any “fiscal drag” that may
already be occurring.
“A second danger in the relationship between monetary and fiscal
policy is the notion of us providing stimulus to offset fiscal drag,” he
said, recalling that in the late 1960s, “fiscal drag was overstated and
as a result we provided too much stimulus, which contributed to the rise
in inflation in the late sixties, which laid the groundwork for the
disastrous 1970s.”
“So I think we need to be careful about offsetting estimated fiscal
drag,” he said.
In fact, though, Fed officials have indicated that one reason for
the FOMC’s “QE3″ program of bond buying and delay of rate hikes until at
least mid-2015 was to cushion the economy against the so-called “fiscal
cliff” of automatic tax hikes and spending cuts due to hit in January.
The Congressional Budget Office, the International Monetary Fund
and others have warned the economy could go back into recession if the
fiscal cliff is not averted.
** MNI **
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