Federal Reserve Bank of Philadelphia President Charles Plosser called for creation of a clear boundary between fiscal and monetary policy, saying Fed involvement in fiscal matters risks spurring inflation.
“It is simply good governance and wise economic policy to maintain a healthy separation between those responsible for tax and spending policy and those responsible for money creation,” Plosser said in an essay accompanying the release of the Philadelphia Fed’s 2012 annual report.
“The combination of a financial crisis and sustained fiscal imbalances has led to a substantial breakdown in the institutional framework and accepted barriers between monetary and fiscal policy,” Plosser said. “The ability of the central bank to maintain price stability can also be undermined when the central bank itself ventures into the realm of fiscal policy.”
The Federal Open Market Committee this week said it will keep buying $85 billion in Treasuries and mortgage-backed securities every month while citing “inflation persistently below its 2 percent objective.” The Fed, seeking to spur growth and bring down 7.4 percent unemployment, has expanded its balance sheet to $3.57 trillion in three rounds of bond purchases known as quantitative easing.
“When the Fed engages in targeted credit programs that seek to alter the allocation of credit across markets, I believe it is engaged in fiscal policy and has breached the traditional boundaries established between the fiscal authorities and the central bank,” Plosser said. “It is important to restore the bright boundaries between fiscal and monetary policy.”
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