The US Federal Reserve board recently published a monetary statement asserting that economic conditions warrant ‘exceptionally low levels for the federal funds rate at least through mid-2013’.

Fed board member Richard Fisher, president of the Dallas Fed, was one of three dissenters and yesterday shed some light on his disagreements with Ben Bernanke. His concern is not inflation. Rather, he is worried that the statement could have the opposite impact to that intended:

Now, put yourself in the shoes of a business operator. On the revenue side, you have yet to see a robust recovery in demand; growing your top-line revenue is vexing. You have been driving profits or just maintaining your margins through cost reduction and achieving maximum operating efficiency.

You have money in your pocket or a banker increasingly willing to give you credit if and when you decide to expand. But you have no idea where the government will be cutting back on spending, what measures will be taken on the taxation front and how all this will affect your cost structure or customer base.

Your most likely reaction is to cross your arms, plant your feet and say: “Show me. I am not going to hire new workers or build a new plant until I have been shown what will come out of this agreement.”

Moreover, you might now say to yourself, “I understand from the Federal Reserve that I don’t have to worry about the cost of borrowing for another two years. Given that I don’t know how I am going to be hit by whatever new initiatives the Congress will come up with, but I do know that credit will remain cheap through the next election, what incentive do I have to invest and expand now? Why shouldn’t I wait until the sky is clear?”

Fisher is suggesting that while low interest rates do encourage investment, permanently low interest rates take away any urgency to do so now. Seems somewhat logical to me, and perhaps an experience the Japanese can relate to.