Fed official stirs controversy

New board member Richard Fisher has been called a loose cannon and refreshing

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November 30, 2005|By BLOOMBERG NEWS

DALLAS -- Richard W. Fisher, who calls himself the Federal Reserve's "weakest member," nonetheless is one that investors can't afford to ignore.

Baseball metaphors that the Dallas Fed president tossed into a June interview left investors parsing whether a central bank in the "eighth inning" of rate increases was nearing a pause. Over two days in October, traders say, Fisher contributed to the loss of $235 billion in stock market wealth when he said inflation was near the top of "the Fed's tolerance zone" and that central bankers must pre-empt an "inflation virus."

The opinions Fisher has voiced since joining the Fed in April led investors and economists to voice opinions about him. One camp considers him irresponsibly loose-lipped; another, a refreshing break from Chairman Alan Greenspan's management style, which emphasizes consistent and predictable messages to the markets. Either way, Fisher has their rapt attention.

Steven Einhorn, a partner at $4 billion New York hedge fund Omega Advisors Inc. and former head of global research at Goldman Sachs Group Inc., says Fisher is prone to "extreme language" that is "bothersome."

At the same time, Robert Brusca, president of Fact & Opinion Economics in New York and the former chief of the New York Fed's international financial markets division, says, "What we see is a Fed president trying to be honest with us."

The 56-year-old Fisher, a former Dallas money manager and U.S. Senate candidate, says he doesn't have nearly the power to roil markets that others may think he does. "Can you imagine Warren Buffett or the folks at Tweedy Browne or any other serious equity investor selling or buying a stock because of what the president of the Dallas Fed says?" he asks in an interview. "No way."

Fisher is one of five regional Fed bank presidents who, along with governors in Washington, vote on interest rates. All 12 presidents participate in discussions on policy.

Investors were paying attention June 1, when two-year Treasury notes surged after Fisher's "eighth inning" comment as traders increased bets the Fed was near the end of rate increases. Treasuries pared some gains that day as later reports included his statement that the central bank might need to go into "extra innings."

The "eighth inning" comment "turned out to be absolutely wrong," says economist Ken Kim of Stone & McCarthy Research Associates in Skillman, N.J. The Federal Open Market Committee has since raised rates four times and signaled it isn't finished yet.

Fisher, for his part, says he made a mistake by agreeing to the CNBC television interview in which he made the comments. He says his remarks were picked up and "truncated" by news agencies, and says, "I did not say the game was over."

On Oct. 4 and Oct. 6, Fisher gave speeches in Dallas and in Waco, Texas, using the "tolerance zone" language in the former and the "inflation virus" language in the latter. His comments weren't out of line with what his peers were saying - just more vibrant. The same week, Thomas Hoenig of the Kansas City Fed said his "main concern" was inflation, while Philadelphia's Anthony Santomero said the Fed must keep "shifting" rates higher to keep broader consumer prices low.

It was Fisher, though, who "proved to be a catalyst" moving markets both days, says Michael Panzner, head of sales trading at Rabo Securities USA in New York. The Dow Jones Wilshire 5000 index, the broadest measure of U.S. shares, fell 1 percent Oct. 4 and 0.5 percent Oct. 6, and $235 billion of market value was erased. The effect was short-lived. The Standard & Poor's 500 index has since advanced 6.4 percent and the Dow Jones industrial average is up 6.3 percent.

Fisher's "inflation virus" remark was "odd," given the "tame" inflation rate aside from food and energy, Einhorn says.

One reason Fisher's comments have attracted so much attention is that they are out of character with the way the Fed usually does business. Under Greenspan, the Federal Open Market Committee is an "autocratically collegial committee" in which the chairman "more or less dictates the group `consensus,'" Alan Blinder, former Fed vice chairman, and researcher Charles Wyplosz wrote last year. "The group's decision is essentially the chairman's decision."

Regional presidents can generally say what they want as long as their bank's board agrees with the positions, says W. Lee Hoskins, president of the Cleveland Fed from 1987 to 1991. Even so, they may "get calls from Fed staff in Washington on occasion, if the staff disagrees with something they say."

Fisher said in the Nov. 14 interview - which, he would like known, he granted only after repeated requests - that he hasn't received such a call. He did, however, talk with some Fed governors in Washington about how his remarks had been reported. After his Oct. 4 speech, he called himself the Fed's "rookie" and "weakest member of the team," and now says he doesn't plan to do another television interview.

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