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Speech by Richard W. Fisher, President and CEO (2005–2015)

Comments on Monetary Policy and an Annual Texas Economic Review

Richard W. Fisher's Remarks before the Dallas Business Club, Dec. 3, 2014.

December 3, 2014 Dallas

Thank you, Alden [McCall]. I feel right at home in a room full of MBAs. As many of you know, I am not a PhD economist like the majority of my colleagues sitting on the Federal Open Market Committee (FOMC). I admire my colleagues tremendously for their intellectual capacity and their well-trained insights into the dismal science of economics and the arcana of monetary policy, but I am proud of just being an MBA. I was privileged to attend all those schools Alden mentioned: the Naval Academy, Harvard and Oxford. But I feel that the MBA program at Stanford Business School prepared me best for my career as a banker, a money market operator, and for the past decade, a policymaker at the Federal Reserve. (Though plebe year at Annapolis probably best equipped me for the sleep deprivation and the pressure we operated under during the financial crisis). So Alden, I begin with a tip of the hat to the MBAs you have assembled this evening.

I am going to talk about Texas tonight, this being my annual report on the status of the Texas economy. I will walk you through a series of slides that illustrate the strength of the Texas economy, a series of economic records we have set this year, and to provide a balanced view, some of the growing pains that we are encountering. But first, I want to make a comment on monetary policy.

Thinking Outside the Box

It strikes me as timely for the Fed to consider implementing one of the possible options under the “normalization principles” the FOMC articulated in September: allowing our security holdings to run off as the bonds in our massive portfolio mature.[1] Before you jump out of your skin at this “radical” thought, let me ask you to consider the following.

The 10-year Treasury note has rallied in price and declined in yield to 2.29 percent. German 10-year bunds, the equivalent market-anchoring European security, are trading to yield 0.74 percent; the Japanese 10-year yields 0.42 percent. The spread between the U.S. and the German sovereign yields is slightly narrower than it was at the end of third quarter 2014, but it remains historically large and attractive for investors.[2] Hold that thought.

Now, if you read page C3 of today’s Wall Street Journal, specifically the article titled “Watchdog Warns of Risks in Markets” about the risks of a repeat of the bond market turmoil of October and concerns about market stability as seen through the eyes of the Office of Financial Research (a bureaucracy of some 225 people and growing, created by the Dodd-Frank law), you would have noted the following sentences: “A reduction in securities that are available to lend against in financial markets—such as Treasury bonds and asset-backed securities—also is fueling...volatility. The securitization markets have shrunk since the financial crisis and the Federal Reserve has further reduced the amount of available securities by snapping up trillions of dollars in bonds in recent years.” Let me repeat that last clause: The Federal Reserve has further reduced the amount of available securities by snapping up trillions of dollars in bonds in recent years. To be precise, $1.7 trillion of Treasuries and asset-backed securities were purchased under QE3, on top of the $2 trillion purchased under the previous rounds of quantitative easing.

To be sure, we have instituted programs to counter this problem: We have developed sophisticated operations whereby we sell assets in our portfolio and promise to buy them back at a later period. This is known as our overnight reverse repurchase agreement (ON RRP) facility, and its net effect is to shift longer-term securities out of our portfolio and into the hands of market operators. This has expanded the traditional reach of our New York desk, where the aggregate portfolios of the 12 Federal Reserve banks are traded under directives given it by the FOMC. Thus the Fed's reach—some would say intrusion—into trading markets has been expanded.

Now, let's bring together these observations with the thought I asked you to hold earlier. It strikes me that given current circumstances, it would do no harm to start slowly trimming our holdings by letting them roll off as they mature. My sense is that presently, we could do this:

(a) While still maintaining the attractiveness of investing in Treasury and agency securities relative to other highly liquid sovereign markets and not sparking significant increases in rates;

(b) Simultaneously providing some alleviation of the collateral shortage we have helped create, and;

(c) Reducing the need for the New York desk to perform the complicated jujitsu we at the FOMC have tasked it with in creating alternative strategies that stretch its traditional mandate and which may give further rise to congressional criticism of the Federal Reserve and a New York Fed that some influential lawmakers already consider to be either too big for its britches or not being able to fill out its suit. This would make crystal clear to Congress and the public our stated desire to make the ON RRP facility a temporary one that will be eliminated when it is no longer necessary.

Mind you, the above proposition does not imply any rush to raise the fed funds rate or its equivalents, such as the rate on excess reserves. That will depend on progress made toward meeting our dual objectives of maintaining price stability around the FOMC’s 2 percent target while facilitating full employment. Nor should it be interpreted as a criticism of the very able people we have on the trading desk: I hold them in highest regard; they perform their duty admirably. It simply is addressed at seizing the moment to kill three birds with one stone and do so with minimum violence to the market.

Of course, a more effective way to put collateral back into the market would be to sell outright a carefully measured portion of our portfolio. There could even be room for the market to stomach this in its current condition. But in my opinion, this might be too radical a departure from the exit principles we announced and would risk undermining confidence in the FOMC.

This is my personal view. I realize it represents thinking “outside the box.” But in my final four months at the Fed, I plan to urge my colleagues to think more outside the box in this and other ways in the interest of securing sound money, a sound economy and sound markets.

And now to some Texas brag.

Texas Brag

Allow me to walk you through some charts and comment on each on them.

Thank you. And now in the great tradition of central bankers, I would be happy to avoid answering any questions you and your colleagues might have.


The views expressed by the author do not necessarily reflect official positions of the Federal Reserve System.


  1. The FOMC’s “Policy Normalization Principles and Plans” released on Sept. 17 is available at
  2. Over the past 15 years, the U.S. long rate has averaged about 40 basis points higher than the German long rate. Since January 2013, the yield spread has widened by 110 basis points to about 1.50 percent. Over the same period, German 10-year inflation expectations have dropped from 1.9 percent to 1.0 percent, or 90 basis points. U.S. 10-year CPI inflation expectations have dropped from 2.3 percent to 2.2 percent—just 10 basis points. So it is worth noting that the drop in German inflation expectations relative to U.S. expectations can account for most of the widening of the yield spread between these two sovereigns. For investors who measure performance in terms of nominal returns or returns against nominal indexes, however, the currently widened spread is relatively attractive.
About the Author

Richard W. Fisher served as president and CEO of the Federal Reserve Bank of Dallas from April 2005 until his retirement in March 2015.