Richard W Fisher: “Not to be used externally, but also harmful if swallowed” – projecting the future of the economy and lessons learned from Texas and Mexico Remarks by Mr Richard W Fisher, President and Chief Executive Officer of the Federal Reserve Bank of Dallas, before the Dallas Regional Chamber of Commerce, Dallas, Texas, 5 March 2012.. *  *  *  The views expressed by the author do not necessarily reflect official positions of the Federal Reserve System. I have been asked to speak about the economy. I am going to take a different approach than is typical for a Federal Reserve speech. I’ll eschew making the prototypical forecast, except to note that from my perch at the Federal Reserve Bank of Dallas, I presently see that: a.) On balance, the data indicate improving growth and prospects for job creation in 2012. However, the outlook is hardly “robust” and remains constrained by the fiscal and regulatory misfeasance of Congress and the executive branch and is subject to a now well-known, and likely well-discounted, list of possible exogenous shocks – the so-called “tail risks” – posed by possible developments of different sorts in the Middle East, Europe, China and elsewhere. And b.)
Besides dealing with short-term volatilities, another related challenge that has come with the reality of QE tapering is maintaining strong economic outlook. Specifically, recent data seem to suggest that signs of economic softness that are reflected in, for instance, deteriorations in the current account performance and weak public finances, are likely to amplify the probability of abrupt flow reversals. That is, the remaining pool of funds seems to differentiate between their investment destinations based more on fundamentals, as is exemplified in the recent episodes of substantial outflows in some of the “Fragile Five” countries. BIS central bankers’ speeches  1  6. When looked at from this fundamentals perspective, Thailand’s recent economic slowdown and political setback definitely come to mind as another growing concern. Particularly, manufacturing production and private spending have already shown signs of moderation in the midst of political uncertainty and poor economic outlook. This, combined with the likely additional delay in public spending, could have further dampening effects on growth. Moreover, should the current political situation persist, prolonged political instability will certainly have dire consequences firstly on the tourism industry but also eventually on our ability to maintain and attract the FDI flows. The country’s higher credit default swap, if left unchecked, could lead to higher funding costs in the financial markets and certainly constitutes another challenge going forward. I do hope, however, that political uncertainty will be a short-term factor and that political stability will be achieved again once agreements are reached among the different groups in the society. 7.