"We can expect to see changes in global monetary policy. I miss the time before the crisis when we could meet once a month to set the interest rate, and that would end our role for that month. But we now find ourselves rushing about during the month to find the holes we must plug at home to prevent the floodwaters entering," Governor of the Bank of Israel Prof. Stanley Fischer told the Israel Economic Association today.
"I believe that, in a few years, and I decline to say exactly how many, we will return to a more normal environment. In my opinion, our lives, and our textbooks, will be more complicated and less clear. But if we recognize that there is a lot more uncertainty and that there are many things we don’t understand, our work will be easier."
Fischer said that the Bank of Israel should not have to signal the market when it intends to change the interest rate, and mentioned the financial market shock when the US Federal Reserve raised the interest in 1994, which he said made it more cautious.
"In the past, I believed that we should send hints to the market that we believe that we will soon change the interest rate. But too often I found that when the time for a decision came, I had changed my mind, and that it would have been better not send such hints. The reason we make a monthly interest rate decision is that circumstances frequently change," Fischer said.
Commenting on the question most worrying the markets today - how the Fed will pull back from its support of the markets (it is keeping the US interest rate at 0-0.25% and buys $85 billion of T-Bills a month), Fischer said, "In 1994, the Fed began raising the interest rate, after a long period of rate cuts. The day that happened, there were great shocks in the world's financial markets. The Fed remembers this, and it knows that if it begins to sell large quantities of T-Bills, it will cause severe price shocks in the markets.
"The Fed therefore has another tool, which gives the banks the right to make deposits in it. The Fed can use the interest on these deposits for long terms without the need to sell bonds. There will be consequences on the size of the Fed's balance sheet, and this is also a very interesting issue."
Fischer praised Federal Reserve Board Chairman Ben S. Bernanke, saying that he had learned the lessons of the Great Depression and handled the crisis of the past few years "more effectively."
Published by Globes [online], Israel business news - www.globes-online.com - on June 4, 2013
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