Blog U.S. is a racehorse compared to rest of the world
Fisher, who once famously referred to the U.S. economy as “the best looking horse in the glue factory,” says a better analogy today would be Secretariat, the record-setting thoroughbred who won the 1973 Belmont Stakes by 31 lengths.
“We are Secretariat,” Fisher said. “Nobody anywhere else on the planet can outpace the United States.” The NAFTA partners Canada, Mexico, and the U.S. represent the most dynamic region in the world, he added.
Citing rising U.S. economic momentum, Fisher repeated his recent calls for modest interest rate hikes now, before inflation pressures grow so large that more drastic action is required.
“I believe (moving too late) could shock the economy and frighten the markets,” said Fisher, in his first speech since leaving the Fed on March 19.
The former U.S. Federal Open Market Committee (FOMC) member kept a keen eye on the U.S. energy sector during his time at the Fed in Dallas. The rapid decline in oil prices over the last year has effectively added somewhere between 0.3 and 1.3 percentage points to U.S. GDP, or the equivalent of a USD500 billion tax cut.
Fracking has also transformed the global oil market and relations among the world’s other producers. Asked what was ahead for oil prices, Fisher said it would take “a couple of years” to know for sure.
“I think the Saudis were late in realizing what we accomplished in the United States,” Fisher said. Still a “swing producer,” the Saudis will take some time to sort out the impact of fracking oil and how to respond. The U.S., long dependent on imported oil, is now a net exporter and has become a swing producer as well, Fisher added.
But while the U.S. oil boom has underpinned the tepid economic recovery from the 2008-2009 crisis, it also masks rising inflationary pressures, he said.
“People know that inflation is being held down by the big decline in energy prices.
We also know that once energy prices stabilize, headline inflation is likely to bounce back up,” Fisher said.
If US GDP continues at its recent pace near 2.5 percent, job gains will push the unemployment rate below its “natural” level, or the theoretical maximum without sparking inflation. That would push the economy into “dangerous territory,” Fisher said.
Historically, every time the Fed has begun to tighten credit after reaching full employment, recessions have followed, Fisher said.
The FOMC’s hesitation, while “risky”, is understandable, given the “taper tantrum” of 2013.
“One never wants to incur that risk again,” he said.
But that doesn’t mean the Fed can afford to move slowly. Drawing on his experience as a midshipman at the U.S. Naval Academy, Fisher compared monetary policy to ship navigation - both act with a lag.
“You have to begin slowing down, miles before you reach your destination,” Fisher added.