Plosser Says Fed Should Detail Asset Sales While It Raises Interest Rates
Federal Reserve Bank of Philadelphia President Plosser
Andrew Harrer/Bloomberg
Charles Plosser, president of the Federal Reserve Bank of Philadelphia.
Charles Plosser, president of the Federal Reserve Bank of Philadelphia. Photographer: Andrew Harrer/Bloomberg
March 25 (Bloomberg) -- Michael Aronstein, president of Marketfield Asset Management, talks about the outlook for the U.S. stocks, economy and Federal Reserve policy. He speaks with Matt Miller, Carol Massar, Adam Johnson and Sheila Dharmarajan on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Federal Reserve Bank of Philadelphia President Charles Plosser laid out a strategy for withdrawing record monetary stimulus and said the improving economy means policy makers should consider how to exit.
The central bank should set a pace for selling its mortgage and Treasury holdings in conjunction with raising interest rates, Plosser said today in a speech in New York. He suggested selling $125 billion for every 0.25 percentage-point rise in the benchmark rate to almost eliminate $1.5 trillion in bank reserves.
Treasuries fell after Plosser, 62, a skeptic of the Fed’s decision to expand bond buying in November, described one of the most detailed plans by a policy maker for how to tighten credit and shrink a $2.6 trillion balance sheet. Fed officials were discussing the exit strategy a year ago before a slowing recovery led them to increase stimulus.
“By tying sales to interest rate decisions, it allows the process for selling assets to be conditional on economic outcomes in ways that are familiar to market participants,” Plosser said at a symposium hosted by the Shadow Open Market Committee, a group of economists who critique Fed policy. “This should provide a degree of comfort to the markets and reduce uncertainty about the path of sales.”
The yield on 10-year Treasuries rose to 3.44 percent at 5:15 p.m. in New York from 3.41 percent late yesterday, according to Bloomberg Bond Trader prices.
Next Steps
Plosser was among four Fed officials today discussing either the end of asset purchases or potential next steps, underscoring that central bankers are pondering how and when to unwind their programs to revive the economy after the deepest recession in seven decades.
Minneapolis Fed President Narayana Kocherlakota, speaking with reporters in Marseille, France, said the U.S. economy would have to “worsen materially” for the central bank to consider extending its bond purchases past June. Atlanta Fed President Dennis Lockhart said in a speech in Fort Myers, Florida, that while current policy is appropriate to bring about a moderate expansion and stable prices, he is ready to tighten policy if recent higher inflation persists.
Chicago Fed President Charles Evans told reporters at the bank that the Fed has less need to support the economy beyond this round of asset purchases, and any changes to the central bank’s stimulative policies should be considered some time after the program ends. “The economy definitely continues to improve each month,” he said.
‘Broadly Accurate’
If Plosser’s favorable economic outlook is “broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy,” the Philadelphia Fed chief said.
Plosser, responding to questions after the speech, cautioned that he doesn’t have the “foggiest idea” if his plan will be implemented. He is among the most aggressive Fed proponents of attacking inflation through tighter monetary policy, dissenting twice from decisions to lower borrowing costs in 2008.
He co-chaired the shadow group before joining the Philadelphia Fed as its president in 2006. The event was also hosted by Economics 21, a Washington research group.
Bond Purchases
The Fed is scheduled to complete $600 billion of Treasury purchases in June under the second round of so-called quantitative easing; officials have given little indication what they will do after that. In speeches and testimony over the past two years, Chairman Ben S. Bernanke has listed the Fed’s tools for tightening credit, including raising rates, draining reserves and selling assets, without committing to the timing, sequence or aggressiveness of use.
Plosser said today he is focusing on the “design” of the exit strategy, not when to execute it. “It ought to be as rule- based as we can make it and as predictable as we can make it,” while still being responsive to the economy, he said after the speech.
Using the tool of raising the interest rate on banks’ reserves alone isn’t a cure-all because it doesn’t shrink the Fed’s assets, Plosser told reporters. “I want the balance sheet smaller,” he said. He said he’s worried about the Fed “getting behind the curve.”
At the Federal Open Market Committee’s last meeting on March 15, Plosser joined Fed policy makers in unanimously reaffirming plans to buy Treasuries while saying the recovery is gaining strength and that higher energy prices will have a temporary effect on inflation. The Fed has kept the federal funds rate close to zero since December 2008.
‘Significant Strength’
“The economy has gained significant strength and momentum since late last summer and seems to be on a much firmer foundation going forward,” Plosser said today. Companies are hiring workers, and weakness in commercial and residential real estate shouldn’t “prevent a broader economic recovery,” he said.
Turmoil in the Middle East and North Africa, along with Japan’s earthquake, tsunami and nuclear disaster, risk pushing up oil prices and damping the U.S. recovery, Plosser said. Still, such risk “is small and short term, assuming Japan is able to stabilize its nuclear reactors and political unrest in the Middle East does not dramatically disrupt Saudi Arabia, the region’s largest oil producer,” he said.
Jump in Spending
The economy grew at a revised 3.1 percent annual rate in the fourth quarter, up from a prior estimate of 2.8 percent, figures from the Commerce Department also showed today. The gain was led by a jump in consumer spending. Consumer sentiment in the U.S. dropped more than forecast in March, according to the Thomson Reuters/University of Michigan index, constrained by higher gasoline costs and the impact from Japan’s earthquake.
Analysts in a Bloomberg News survey earlier this month were divided over how long the Fed will keep its bond portfolio stable after the purchases end, with a plurality of 16 betting on a period of four to six months. Five economists said the Fed would halt the policy once QE2 ends; 11 said it would keep reinvesting for one to three months; 14 said seven to nine months and four said more than nine months.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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