Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank’s program to expand its assets by $600 billion will hinder future efforts to withdraw stimulus and avert a rise in prices.
“One cost of expanding the Fed’s balance sheet is that it will complicate our exit strategy from a very accommodative monetary policy, when that time comes,” Plosser said in a speech today in Rochester, New York.
Policy makers led by Chairman Ben S. Bernanke plan to meet in Washington on Dec. 14 to review a program to buy Treasury securities to spur growth and keep inflation from falling too low. Such “quantitative easing” may provide stimulus for too long, fueling inflation, Plosser said to a seminar sponsored by the University of Rochester’s Simon Graduate School of Business.
“Even with the best of intentions, if we don’t act aggressively and promptly, we may find ourselves behind the curve and at risk for substantial inflation,” he said. “The Fed is developing and testing tools to help us prevent such a rapid explosion in money.”
Plosser said before the Fed’s Nov. 3 meeting that he didn’t support expansion of the balance sheet. Today he said he’s “still somewhat skeptical that we will see much of a stimulative effect from the new round of purchases.”
“It is not clear to me that a further reduction in long-term interest rates will do much to speed up the reduction in the unemployment rate to more acceptable levels,” Plosser said. If the purchases do not increase growth by much, “then the argument that the program will reduce the risks of deflation is also substantially weakened.”
Other Fed policy makers have expressed concerns about the purchases, dubbed QE2 for the second round of quantitative easing. Fed Governor Kevin Warsh said he was “less optimistic than some” about the program’s benefits, and Richmond Fed President Jeffrey Lacker told reporters last month that he “thought the risks exceeded the benefits” from further easing.
The Fed’s decision to undertake new bond purchases sparked a political backlash in Washington. Last month, two Republicans, Tennessee Senator Bob Corker and Indiana Representative Mike Pence, proposed removing the Fed’s full employment mandate to focus the central bank on stable prices alone. Corker plans to introduce legislation next year.
Plosser told reporters after the speech that he has argued for 20 years that “providing a stable price environment is the best way for the Fed to support economic growth and stability.”
Price stability “ought to have some primacy in the way we think about our goals,” he said. Still, he said it’s “incumbent on the Congress to set our mandates.”
At its November meeting, the Fed said “the pace of recovery in output and employment continues to be slow” and that household spending remains constrained by “high unemployment, modest income growth, lower housing wealth and tight credit.”
The exchange rate of the U.S. dollar is “not a target” of monetary policy, Plosser said. “Our objective wasn’t to lower the dollar as a way to stimulate economy.”
The Fed’s Beige Book anecdotal survey of business contacts, released yesterday, said the economy gained strength across much of the U.S. as hiring improved, manufacturing expanded and retailers anticipated a stronger holiday shopping season.
“History has taught us that recoveries are rarely a smooth upward trajectory,” he said. “Yet, the most recent data suggest that the economy is emerging from the summer doldrums.”
Crisis in Europe
One risk to his forecasts, Plosser told reporters, is the debt crisis in Europe.
“Europe is a risk out there for us,” he said. “Could it adversely affect some momentum building for us in the U.S.? It might. Right now I tend to think it’s not going to.”
Plosser said that while inflation is low, “it does not follow that sustained deflation is imminent or even likely.”
U.S. economic growth will probably pick up to 3 percent or 3.5 percent over the next two years, and unemployment will fall to 8 percent to 8.5 percent by the end of next year, he said.
Fed presidents rotate voting on monetary policy with Plosser, 62, voting next year.