Fisher = Neutral Bias

Dallas Fed President Richard Fisher gave a speech today on education fittingly entitled "You Earn What You Learn," though he did spend a good part of it on monetary policy.

Fisher's speeches aren't usually subtle. There's usually nothing to read between the lines, so it doesn't really pay to over-analyze them. There are two parts I want to highlight, both basically speak for themselves.

Here's how he described last Tuesday's FOMC deliberations:

As we sat down to the FOMC table on Tuesday, we were faced with a situation that, drawing on my Naval Academy days, I would liken to a ship navigating a narrow passage between two shorelines.

On one shore, we have an otherwise healthy economy weakened to an unknown degree by a correction to excessive speculation in its housing sector and related financial instruments. On the price front, the economy has been experiencing mitigation in inflationary tendencies, thanks, I believe, to prudent monetary policy—albeit against a background of an energetic global economy that continues to create upward price pressures on all sorts of commodities, on transportation costs and even on what was once assumed to be an endless supply of cheap imports from China. If we had maintained the anti-inflationary course we had been following for more than 14 months by holding the fed funds rate at 5.25 percent, I believe we would have risked oversteering our course and potentially run afoul of the shoals of unacceptably slow economic growth. ... Recent trends in inflationary impulses and expectations, however, appeared to me to provide some wiggle room to adjust our tiller and steer a more growth-oriented course.

Looking to the other shoreline, we were confronting the rocky outcropping that economists call moral hazard. ... Overcorrecting our course with too aggressive a shift in the fed funds tiller would have, I believe, undermined the discipline that market forces impose upon wayward financial institutions and investors.

Fisher currently doesn't have a vote on the FOMC, but he will starting with the Jan 30, 2008 meeting.

The remainder of the speech was on education and the knowledge economy. Given that the UAW just went on strike today, this was particularly apt:

At the end of 2005, the U.S. auto and auto parts manufacturing industry employed about 1.1 million workers and added 0.8 percent of the value to our gross domestic product. The legal services sector employed nearly the same number but contributed 1.5 percent of the value added to GDP. In other words, lawyers produce twice as much as automobile workers. ...There is no more vivid demonstration of how services have replaced manufacturing as the engine of our economic prosperity.

It's also a good reminder that recessions in the future are unlikely to play out the way they have in the past.

P.S.: Bernanke also gave a speech on education today (Education and Economic Competitiveness), but, as has been his habit recently, he made no comment on monetary policy.