Instead of “Banking Rules”, Fischer should be concerned with “Monetary Policy Rules”

According to Stan Fischer, it wasn´t the Fed´s fault:

“We seem to have forgotten that we had a financial crisis, which was caused by behavior in the banking and other parts of the financial system, and it did enormous damage to this economy,” Fischer told CNBC’s Sara Eisen in the lobby of the International Monetary Fund, responding to a question about the potential rolling back of Dodd-Frank rules.

“Millions of people lost their jobs. Millions of people lost their houses,” Fischer said. “This was not a small-time, regular recession. This was huge, and it affected the rest of the world, and it affected, to some extent, our standing in the world as well. We should not forget that.

“The strength of the financial system is absolutely essential to the ability of the economy to continue to grow at a reasonable rate, and taking actions which remove the changes that were made to strengthen the structure of the financial system is very dangerous.”

And is “on track” to repeat the mistake:

On another issue, Fischer said he believes the Fed still will hike rates three times in 2017despite recent signs of a slowing economy.

Fischer attributed much of the slowness, both in the economy and the inflation rate, to seasonal factors that will go away as the year progresses.

“We’re feeling that way and so far haven’t seen anything to change that,” he said during an interview from the sidelines of the joint meeting of the International Monetary Fund and World Bank. “But we are dependent on what happens in the economy, and we’re not tied to three.”

Interestingly, all “unwanted” things “will go away” in time, just like “inflation has been low due to temporary effects of low oil prices”.

By saying the Fed “is dependent on what happens in the economy”, Fischer misses the more relevant part of the equation, that “the economy is Fed-dependent”. Early last year we identified the following loop (or trap):

[market-strengthening -> Fed tightening talk -> market weakening -> Fed backing off -> market strengthening -> Fed tightening talk -> … ]

It seems the Fed is unable to “break-out”!

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