Storms on the Horizon
Remarks before the Commonwealth Club of California

by Richard W. Fisher
San Francisco, California
May 28, 2008

Richard W. Fisher is the President and CEO of the Federal Reserve Bank of Dallas, one of the twelve Federal Reserve Banks of the Federal Reserve System. Mr. Fisher currently serves as a member of the Federal Open Market Committee, which is the most important monetary policymaking body of the Federal Reserve System. It is responsible for formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. In this presentation, Mr. Fisher steps outside his role as a central banker to focus on fiscal policy.

An excerpt of the speech is set forth below. For the complete speech, click here.

I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.

You might wonder why a central banker would be concerned with fiscal matters. Fiscal policy is, after all, the responsibility of the Congress, not the Federal Reserve. Congress, and Congress alone, has the power to tax and spend. From this monetary policymaker’s point of view, though, deficits matter for what we do at the Fed. There are many reasons why. Economists have found that structural deficits raise long-run interest rates, complicating the Fed’s dual mandate to develop a monetary policy that promotes sustainable, noninflationary growth. The even more disturbing dark and dirty secret about deficits—especially when they careen out of control—is that they create political pressure on central bankers to adopt looser monetary policy down the road.

Part 1:

Part 2: