Plosser Says Fed is Prepared to Respond to Europe Crisis

Federal Reserve Bank of Philadelphia President Charles Plosser said policy makers are monitoring Europe’s debt crisis and are prepared to act should officials in the region prove unable to contain its spread.

“The Fed is watching Europe very carefully and the consequences of that, how that will play out if Europe suffers a financial crisis for some reason,” Plosser said today in a “Bloomberg Surveillance” television interview with Tom Keene and Sara Eisen. “We are prepared to respond.”

Spanish 10-year bond yields rose above 6 percent yesterday, climbing by the most in two months, as Prime Minister Mariano Rajoy defied anti-austerity protesters with a plan to cut the deficit by at least 18 billion euros ($23.2 billion) next year. Police in Athens dispersed protesters with tear gas this week.

Plosser also reiterated comments from his Sept. 25 speech in which he said new bond buying announced by the Fed this month probably won’t boost growth or hiring and may jeopardize the central bank’s credibility. Policy makers said Sept. 13 that they’ll begin a third round of quantitative easing by purchasing mortgage-backed securities at a pace of $40 billion per month until labor markets “improve substantially.”

“We’re in uncharted territories, not just for monetary policy but for our economy and the kind of headwinds we’re facing,” said Plosser, who doesn’t vote on policy this year. “There’s plenty to keep you up at night.”

The policy-setting Federal Open Market Committee is using unconventional tools to attack a jobless rate stuck above 8 percent since February 2009. The FOMC also said this month it will probably hold the federal funds rate near zero at least through mid-2015. The Fed had forecast since January that rates will stay low at least through late 2014.

Officials ‘Frustrated’

Keeping the central bank’s main interest rate near zero since December 2008 is “an extraordinary state of affairs,” and policy makers are “frustrated” because the economy still isn’t doing well, Plosser said.

The world’s largest economy grew less than previously forecast in the second quarter, the Commerce Department said today. Gross domestic product expanded at a 1.3 percent pace in the second quarter after growing at a 2 percent rate from January through March. The revision, the third estimate for the quarter, compared with a prior estimate of 1.7 percent.

Before announcing QE3 this month, the Fed expanded its balance sheet with two prior rounds of bond purchases. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

“The risks and the costs might be very much higher than whatever small benefits we get,” Plosser said today. “If it doesn’t work, we risk the credibility of the institution.”

Plosser, 64, became president of the Philadelphia Fed in August 2006. He was previously dean of the graduate school of business administration at the University of Rochester in New York State. The Philadelphia Fed will next have a vote on policy decisions in 2014.

To contact the reporters on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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