ASMAN: Well, as you mentioned, you were -- you were not only a hedge fund guy, a Federal Reserve officer, etc. You have a lot of touts. Most people didn't realize you were also a poet. Earlier, you talked about these dot charts that the Fed has come out with to describe what various Fed officials believe and now you think maybe it's time to get rid of them. And you put that dissent in the form of a poem, which I'm going to read.

"We gave you form so you'd inform about the price of dough, but all you've done is make for fun, and this we didn't know. So out, damned dot! Out with the lot! It's clearly time to go."

You know, I've got to tell you, it sounds a little like Dr. Seuss, Richard.

FISHER: I was channeling Dr. Seuss, David.

But even if ignoring the risk of deflation, inflation that runs persistently at levels that are lower than our 2 percent objective also have economic costs. First of all, it raises the real or inflation-adjusted cost of capital, and it also redistributes debt burdens, in the sense that when individuals take on debt, they have an expectation for how rapidly prices and their own incomes, wages, will be rising. And when those expectations are frustrated by exceptionally low inflation, debtors find that the burden of their debts is really greater, and that's something that constrains their spending. So we want to avoid persistently having inflation both running higher than our objective, but also running lower than our objective on a persistent basis.

I used to say that the United States was the best-looking horse in the global glue factory. Now, I firmly believe we are the most fit stallion or filly on the global racetrack: Our companies are the most financially prepared and most productively operated they have been at any time during the nearly four decades since I graduated from business school. What is holding them back is not the cost or the availability of credit and finance. What is holding them back is fiscal and regulatory policy that is, at best, uncertain, and at worst, counterproductive. Without fiscal policy that incentivizes rather than discourages U.S. capex (capital expenditure), this accommodative monetary policy aimed at reducing unemployment (especially structural unemployment) or improving the quality of jobs is rendered flaccid and less than optimally effective. And as to the housing markets, prices are now appreciating to levels that may be hampering affordability in many markets.

In short, while the Fed has been moving at the speed of a boomer in full run, the federal government of the United States has at best exhibited the adaptive alacrity of a koala (without being anywhere near as cute).

(President Fisher supplied a footnote explaining that “boomer” is Australian slang for kangaroo.)

“If you’re asked to do something by the president of the United States, it’s very hard to turn it down, but I won’t be asked,” Fisher said. “I think the odds are zero.”

Why? “I have a very defined profile, and it may not be in keeping with the style the president is looking for,” he said. “There’s probably not a stylistic fit.”

As of 2007, the United States had just gone through nearly 25 years of macroeconomic tranquility. As a consequence, relatively few people in the United States saw a severe macroeconomic shock as possible. However, in the wake of the Great Recession and the Not-So-Great Recovery, the story is different. Workers and businesses want to hold more safe assets as a way to self-insure against this enhanced macroeconomic risk.

...

The increase in asset demand, combined with the fall in asset supply, implies that households and firms spend less at any level of the real interest rate—that is, the interest rate net of anticipated inflation. It follows that the Federal Open Market Committee (FOMC) can only meet its congressionally mandated objectives for employment and prices by taking actions that lower the real interest rate relative to its 2007 level. The FOMC has responded to this challenge by providing a historically unprecedented amount of monetary accommodation. But the outlook for prices and employment is that they will remain too low over the next two to three years relative to the FOMC’s objectives. Despite its actions, the FOMC has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I’ve described.

The passage of time will ameliorate these changes in the asset market, but only gradually. Indeed, the low real yields on long-term TIPS bonds suggest to me that these changes are likely to persist over a considerable period of time—possibly the next five to 10 years. If this forecast proves true, the FOMC will only meet its congressionally mandated objectives over that long time frame by taking policy actions that ensure that the real interest rate remains unusually low.

One challenge with this kind of policy environment—and this is closely linked to the overarching theme of this panel—is that low real interest rates are often associated with financial market phenomena that signify instability. There are many examples of such phenomena, but let me focus on a particularly important one: increased asset price volatility. When the real interest rate is unusually low, investors don’t discount the future by as much. Hence, an asset’s price becomes sensitive to information about dividends or risk premiums in what might usually have seemed like the distant future. These new sources of relevant information can lead to increased volatility, in the form of unusually large upward or downward movements in asset prices.

These kinds of financial market phenomena could pose macroeconomic risks. These potentialities are best addressed, I believe, by using effective supervision and regulation of the financial sector. It is possible, though, that these tools may fail to mitigate the relevant macroeconomic risks. The FOMC could respond to any residual risk by tightening monetary policy. However, it should only do so if thecertain loss in terms of the associated fall in employment and prices is outweighed by the possible benefit of reducing the risk of an even larger fall in employment and prices caused by a financial crisis. Hence, the FOMC’s decision about how to react to signs of financial instability—now and in the years to come—will necessarily depend on a delicate probabilistic cost-benefit calculation.

Let me offer a comparison that may highlight that difference. Suppose, instead of monetary policy, we were talking about an example of transportation policy--widening a road to ease traffic congestion. Whether this road project is announced at a televised press conference or in a low-key press release--or even if there is no announcement--the project is more or less the same. The benefit to drivers will come after the road is widened and won't be affected by whether drivers knew about the project years in advance.

At the heart of everything I'll be explaining today is the fact that monetary policy is different. The effects of monetary policy depend critically on the public getting the message about what policy will do months or years in the future.

Upon hearing those two different plans for interest rates, people should have different expectations for what the paths of economic activity and unemployment are going to be. And, in particular, between the 7 percent plan and the 5 1/2 percent plan, the second suggests that times are going to be better for them in general, going forward. It means that individuals don’t need to save as much for bad times ahead. That’s the basic point of providing such forward guidance, to convey the expectation that because times will be better in the future, individuals don’t need to save as much and therefore can spend more now.

In terms of exiting from our balance sheet, we have put out -- a couple of years ago we put out a plan. We have a set of tools. I think we have belts, suspenders, two pairs of suspenders; we have different ways that we can do it. So I think we have the technical means to unwind it at the appropriate time.

Richard Fisher, president of the Federal Reserve Bank of Dallas, said he favors reducing the pace of central bank asset purchases as the U.S. economy gains momentum this year.

“As you approach your goals and things get better, you reduce purchases,” Fisher said in an interview with Kathleen Hays on Bloomberg Radio’s “The Hays Advantage.” “I wouldn’t go from Wild Turkey to cold turkey” in monetary stimulus. “I wouldn’t have favored spiking the punch bowl to the degree we have,” though it would be too abrupt to stop purchases all at once.

Fisher, who doesn’t vote on monetary policy this year, said he opposed the Federal Open Market Committee decision last week to continue purchasing securities at the rate of $85 billion a month. Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to more than $3 trillion to spur growth and reduce unemployment.

Fisher said he agreed with St. Louis Fed President James Bullard, who said Feb. 1 he expects the U.S. economic expansion to pick up enough to allow the Fed to reduce purchases by the middle of the year. A reduction in purchases could be motivated by either an assessment that quantitative easing hasn’t been effective or that the economy gained momentum, the Dallas Fed leader said...

“I would not advocate just stopping the program,” he said. Slowing purchases “allows the market to adjust.”

We have a ranch in Franklin County in East Texas. We have a 2,200-pound bull there that breeds our Longhorn cows. His name, incidentally, is "Too Big to Fail."

Now, Too Big has plenty of liquidity at his disposal; he's fully equipped to do what we want him to do. But if we put him on the opposite side of the fence from those pretty cows, he's unable to perform. Think of the uncertainty I've just spoken of, and especially the uncertainty surrounding the resolution of the fiscal cliff, as a fence. Businesses, just like Too Big, have plenty of liquidity; they have the resources they need to do what we want them to do—in this case, invest in job creation. But as long as that fence of uncertainty is in place, they will not be able to perform.

"I argued that basically we were at risk of what I call a 'Hotel California' monetary policy," Fisher said in an interview with CNBC, referring to an Eagles song about a hotel from which one can never leave. "Theoretically we can check out any time we want from this program, but practically, since we're going to have an engorged balance sheet, we may never be able to leave this position."

I felt an urge at the meeting last week to tie the chairman to the mast, Odyssean-style, and to stuff wax in the ears of my fellow committee members, in order to resist the Siren call of further large-scale asset purchases.

But I have no such powers.

We want to make sure we’re not pushing on a string... Money is basically free, gas tanks are full. Who steps on the gas pedal? Who engages the transmission?

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," Dudley said. "You have to look at the prices of all things."

This prompted guffaws and widespread murmuring from the audience, with one audience member calling the comment "tone deaf."

"I can't eat an iPad," another said.

As reported by Reuters