A Few Questions from Tracy Rowlett

The President and CEO of the Federal Reserve Bank of Dallas, Richard Fisher, has spent most of the last 30 years participating in historical events. He represented the US in trade negotiations with the late Chinese Premier Deng Xiaoping as far back as 1979. He has overseen this country’s trade policies with Asia, Latin America, and Canada, and was chief operating officer of the US government for NAFTA. Fisher is the son-in-law of the late Dallas Congressman Jim Collins, but ran against Kay Bailey Hutchison for Senate. He calls himself politically neutral today, and spoke to us on condition we underscore that he is not speaking for the Fed. His views are strictly his own.

FISHER, PRICED: “I labored in the vineyards of politics and all I got for it was fruit juice.”

Rowlett: How will hurricane Katrina affect the economy?
Fisher: As I talk to you on September 2, it’s too soon to tell. We’re gathering as many facts as we can. The leaders of the energy industry happen to be concentrated in the Dallas Fed’s district. And we’ve got on staff the finest energy economist in the country, Stephen Brown. We’re also studying the Kobe earthquake of 1995, in Japan. Kobe was the sixth-largest port in the world, and it was completely destroyed. We want to learn from that. We have an Open Market Committee at the end of September [when rates are determined]. We will share the facts we’ve gathered—and anecdotal evidence, which is very important.

Economists are driven to model for certainty. They thrive on certainty, and they need numbers to make their case. But I’m an MBA. I come from a business background. Businessmen and women are paid to make decisions under conditions of uncertainty. So one of the jobs that I have is to talk constantly with business leaders. All of us have our tentacles out there, picking up as much information as we possibly can. The whole task is to integrate the great work of a phenomenal economics staff with our judgment. This is a matter of feel and sense and smell and taste. I think that’s what makes a good bank president. Alan Greenspan, by the way, is both a brilliant economist and a first rate business thinker. Which is what makes him a superb Chairman of the Fed.

Rowlett: Why is the Federal Reserve important to our lives?
Fisher: Well, the money supply is the blood flow in the corpus of the body of the economy. And the purpose of the Federal Reserve is to keep the economy growing and to do so in a manner that doesn’t stir the nasty fires of inflation. Under Chairman Alan Greenspan, we set monetary policy, regulate banks, and educate the public on the nation’s monetary system.

Rowlett: Greenspan retires in January. And a recent article said that you may be part of the answer in bringing the Fed into the 21st Century. Are you?
Fisher: I am just one of 19 people across the country, but I would say the world is changing with new questions that are now on the table. I’m fortunate because we have a first rate research staff of over 30 economists here at the Dallas Reserve, and one of our affiliates won the Nobel Prize last year for economics. And all of our economists have one student that they tutor, and that’s me. They also conduct serious research on the issues of our day. We are all focused on the impact of globalization on the gearing of the U.S. economy, and also on making monetary policy for today. We have a lot of questions and we are still searching for answers.

Rowlett: You recently got a lot of negative reaction when you said the federal reserve’s rate-hiking campaign is headed into extra innings. What did you mean by that?
Fisher: Well, I learned first of all not to do interviews on TV because my comments were heavily edited. But we are in the process of removing the monetary stimulus from when we were in a recession. We look at the data and discuss what is going on in the economy every time we meet in the Open Market Committee. And we have been removing that stimulus by tightening the interest rates, and I am just one of 19 people in that discussion. But we will continue to be guided by what we see in the data, and by what our instincts tell us is taking place in the economy.

Rowlett: So what is the future of interest rates?
Fisher: Well, we don’t talk about the future of interest rates. And we don’t talk about where we think the economy is headed. We just do our best to try to get it right.

Rowlett: But every American knows we are emerging from a weak economy.
Fisher: Texas is certainly. We didn’t really come out of the recession until 2003. And now, we are doing very well in all the evidence we see in every sector, except for manufacturing. The Texas economy is very strong right now. And the U.S. economy is doing very nicely. I like to remind people that we are a $12-trillion economy, so when we grow at over three-and-one-half percent, those are huge numbers. We pull up the rest of the world.
And by the way, the Eleventh District of the Federal Reserve which includes all of Texas and parts of New Mexico and parts of Louisiana, the areas that fall under the Federal Reserve of Dallas, produces, in dollar terms, 20-percent more than all of India. So the economy is growing very handsomely, and our job is to see that it continues to grow, but we can’t let that ugly ogre of inflation out of the closet.

Rowlett: Does the economy thrive best under Democrats or Republicans?
Fisher: Former Secretary of State George Shultz told me he asked that question when he was head of the Office of Management and Budget and he worked for Ronald Reagan, and they just couldn’t get anybody to cut spending. So Shultz wanted to know which party was best at curbing spending. And he was told there was no real difference except that Democrats enjoyed it more.

Rowlett: You helped negotiate China’s entry into the World Trade Organization, and you were there in 1979 to meet and work with Deng Xiaoping. Any anecdotes from those meetings?
Fisher: Yes. Deng Xiaoping was probably 4’10″ tall. He had been treated horribly under Mao, but emerged in the late 70’s as China’s most powerful leader. So, he was a little man who turned out to be a giant in Chinese history. In our first meeting, we were all waiting for him in the Great Hall of the People and you could just feel this jolt of electricity as this man walked in behind us and cackled out, “Where are these American capitalists I am supposed to be so afraid of?” So we whirled around and we couldn’t see him at first because we had to adjust our eyesight downward. Deng opened up China and put it on the Capitalist Road, as it’s called. But he said it doesn’t matter if the cat is black or white as long as it catches mice. And because of Deng, they’ve been catching mice in droves.

Rowlett: Is China’s economic growth a threat to the U.S. economy?
Fisher: We always worry about economies that come on very strong. We’ve had these fears in the past about Germany and about Japan. Now the current cause for angst is China. But we need to keep things in perspective. As a former trade official I know there are a lot of things that they need to do to uplift their economy which, today, doesn’t equal that of California. But it is in our best interests to see them succeed and play a role in the world economy rather than being enemies of the United States.

Rowlett: China and Texas have direct trade ties, so is there a role that Texas can play?
Fisher: Well, the leading trading partner for the Dallas-Fort Worth area is China. So, the answer is that we can sell them a lot, and by buying from China we help keep prices down for our consumers. You see a lot of Chinese goods in Wal-Mart or Dollar General and other major discount stores. And that’s how many people put shoes on their children’s feet and clothes on their children’s backs. It’s up to the government and the trade negotiators to see that this trade is a two-way street. But we do consume a lot in the United States where we run a trade deficit and what’s called a current account deficit. And by doing so, we do support the rest of the world to keep their economies going. And we don’t want to see a global recession or worse.

Rowlett: Do you ever shop at a Wal-Mart?
Fisher: Yeah. And I have a membership at Sam’s Club. And I’ve also shopped at Dollar General. We have a little place between Mount Vernon and Mount Pleasant, and I shop at a Sam’s there. Wal-Mart buys a lot from China, but if we weren’t buying from China we’d be buying from somewhere else, because that’s what Americans do. We consume a great deal.

Rowlett: You were also a deputy trade representative when NAFTA was negotiated. Mexican President Vicente Fox recently said a full realization of NAFTA would be an open border with Mexico. Why would we want that?
Fisher: Well, right now what we have is a trading arrangement through NAFTA. And let me remind you that Canada is also a partner in NAFTA, and Canada never gets the respect it deserves. But all three of us are part of NAFTA’s massive trading arrangement which works extremely well. The first President Bush put it in place, and then President Clinton sold it to the congress and implemented it, so NAFTA is a bi-partisan effort. But everything ever created needs to be constantly perfected, and I don’t know how much further NAFTA will go. But I think perfecting NAFTA is what the authorities on all three sides of the border are trying to do.

Rowlett: But an open border would be problematic wouldn’t it? What about the threat of terrorism alone?
Fisher: Well, that’s a matter for the political types and others concerned with national security to worry about.

Rowlett: Texas is now a minority-majority state—about 51% minority, mostly Hispanic. Is there an economic message here?
Fisher: I think the message is to stay flexible. I grew up in Mexico and all of my elementary education was in Mexico. I have a tremendous affection for the Mexican people. They want what everyone else wants which is to improve their lot, and America is the place where that happens, and we need to be flexible and adjust to these changing trends. I don’t think it matters what the color of your skin is.

Rowlett: But is there a price to be paid for flexibility? For example, Dr. Hinojosa of DISD says many of the district’s new students are Hispanic children at the secondary level who don’t speak English and there is no program to accommodate them. And the largest number of high school dropouts are Hispanic.
Fisher: There is no question it is a real challenge. And I know it’s hard. I went to school in Spanish until I was 12, and I got put back a grade because I didn’t speak sufficient English when I came to the United States. So, I know what it means to be unable to communicate. But young minds, properly channeled, can learn very quickly. And if there is anyplace that can and should do it the right way, it has got to be Texas because we have this incredible mix in our culture. Our hope our educational and political leaders can figure out how to do it.

Rowlett: You are a strong proponent of education as a means of keeping America strong. Is Texas making the grade?
Fisher: Well, I don’t really know because I just got back in April. But I’m a prime example of someone who benefited through education. I am the first to be born as an American citizen in my family. My father was Australian, and he told us he went through fifth grade, but we doubted it. But the point is that anyone can make it through hard work in this country, and I was lucky and went to some pretty good schools.  I think education is the key to advancement, particularly in a knowledge based society. And so far as the educational standards in Texas, you can never be satisfied. I think the great institutional engines in this state—the University of Texas system and all the other great universities and colleges we have here—must constantly reach to do still better. And no country anywhere has a higher educational system as good as ours. There are institutions in other countries that are excellent, such as Oxford and Cambridge in England, but most of the top 100 universities are here in the United States. It’s all here. And we need to protect that comparative advantage and grow it.

Rowlett: When you gas up your car these days and you watch those numbers climb, what are you thinking?
Fisher: Yeow! As of yet, we haven’t seen the price pressures from energy reflected in the inflationary numbers. But common sense will tell you that there has to be some inflationary pressure and some impact on growth, however temporary. Question is: if these prices are sustained for a very long time, how do they work their way through the system? We just don’t know the answers yet.

Rowlett: We are seeing major increases in all energy costs, and it appears that other areas are costing more, too. Do you see an eventual drop in the U.S. standard of living?
Fisher: Well I don’t think all costs are going up. It really depends on where you shop. If you shop at the high end that may be the case. But clothing costs have been under outside pressure for many years due to new suppliers, including China and other parts of the world. We have benefited as consumers from globalization. But you have to remember that when you talk to a federal reserve official, we are uncomfortable when we see anything over minimal inflation, and 2% to us is a very high number. Any inflationary pressure always frightens a central banker. Our standard of living is awfully high and the object is to keep it that way.

Rowlett: Where do you stand with those economists who say we should reconsider legislation to protect U.S. business interests?
Fisher: I’m a free trader. Protectionism is a form of taxation on the American people that raises the cost of consumption. It also dulls your senses because you are lulled into an artificial sense of being protected from competition.

Rowlett: From an economic perspective, how threatened are we by terrorism today?
Fisher: Obviously it raises the cost of doing business. It creates friction in the smooth workings of capitalism. Clearly we are affected. But I don’t have a numerical measurement to share with you.

Rowlett: What do you read to stay current?
Fisher: I get up at 4:30 every morning, and by six I’m at a local coffee shop reading. I go through the Financial Times of London, the Wall Street Journal, the New York Times, and the Dallas Morning News, plus a summary that is sent to me through the Federal Reserve System. I also read the Wilson Quarterly, and I try to read a lot of literature. My favorite recent book is written by a Spanish author, and it is called The Shadows of the Wind. And one of the most interesting books I’ve read in years is The Secret Life of Lobsters.

Rowlett: Any further political aspirations?
Fisher: Zero. I labored in the vineyards of politics and all I got for it was fruit juice. I was terrible at it. This is what I really enjoy doing. There are no politics in the Federal Reserve. People are efficient, good at what they do, and kind to each other. Our one mission is to seek the truth, and to provide the most, straight forward, honest and truthful advice that you can in the process. It is an incredible pleasure to be part of this group.