Fed Dissenters Say Pledge Gives Appearance of Targeting Stocks

Fed Reserve Bank of Philadelphia President Charles Plosser
Federal Reserve Bank of Philadelphia president Charles Plosser. Photographer: Scott Eells/Bloomberg

Two Federal Reserve policy makers said the central bank’s commitment to keep its benchmark rate near zero for two years may create a misperception it’s aimed at boosting stocks, which contributed to their opposition.

Philadelphia Fed President Charles Plosser said in an interview yesterday that taking action after stocks tumbled “signaled that we are in the business of supporting the stock market.” Richard Fisher, the Dallas Fed chief, said in a speech that the Fed “should never enact such asymmetric policies to protect stock market traders and investors.” Both also said the policy won’t help spur growth.

Plosser, Fisher and Narayana Kocherlakota of Minneapolis voted against last week’s Fed decision to hold the benchmark interest rate at a record low until at least mid-2013, the most dissent in almost 19 years. The move followed an 18 percent drop in the Standard & Poor’s 500 Index of stocks from the end of April through Aug. 8.

“It was inappropriate policy at an inappropriate time,” Plosser said yesterday in a radio interview in New York on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. Policy makers will probably need to raise rates before 2013 and should have waited to see how the economy performed, he said.

The economy may not need additional monetary stimulus, with inflation rising and unemployment declining since November to 9.1 percent, Plosser said. He hasn’t cut his forecast for 2012 economic growth “very much” as the impact from “shocks” like the earthquake in Japan subsides, Plosser said yesterday in an interview in New York with Bloomberg News editors and reporters. At the beginning of the year, Plosser forecast growth of 3 percent to 3.5 percent in 2012.

‘Excessively Negative’

The Fed is “reacting too quickly here,” Plosser said. “A little patience might be a good idea.” He said the central bank’s depiction of the economy in its Aug. 9 statement was “excessively negative,” and he wants to wait until next month to see if the economic rebound anticipated in the second half of 2011 materializes. Plosser also said he is concerned that inflation will accelerate in 2012 and 2013.

The S&P 500 index rose 0.1 percent to 1,193.89 yesterday, while yields on 10-year Treasuries fell to 2.17 percent from 2.22 percent on Aug. 16.

The Federal Open Market Committee didn’t commit to hold rates low until mid-2013 in response to a global stock market rout in the days leading up to the Fed’s Aug. 9 meeting, Plosser said. Fisher also said yesterday monetary easing shouldn’t be used to boost stocks. “I believe my FOMC colleagues share this view,” Fisher said in Midland, Texas.

‘Bernanke Put’

Some traders might view the easing of monetary policy as a “Bernanke put,” or the idea that the central bank will loosen credit after a stock-market decline, Fisher said.

Both Fisher and Plosser also said the central bank shouldn’t be viewed as a lifeline for the economy when Congress and the White House can’t agree on providing more fiscal stimulus.

“I believe what is restraining our economy is not monetary policy but fiscal misfeasance in Washington,” Fisher said. Instead, the government must build a “modern, appropriate set of fiscal and regulatory levers and pulleys” to encourage investment by private companies, he said.

The FOMC on Aug. 9 also discussed “the range of policy tools available to promote a stronger economic recovery” and said it’s “prepared to employ these tools as appropriate.” Chairman Ben S. Bernanke said in July that the Fed may take new action if the economy stalls, including beginning a new round of bond purchases.

Asset Purchases

Plosser said he hasn’t ruled out the use of “policy tools” including a third round of asset purchases to combat an emergence of deflation or to address financial-market turmoil.

“Clearly we would have to respond as lender of last resort,” Plosser said. He said he doesn’t foresee such a crisis happening.

Fisher told reporters following his speech that he opposes additional asset purchases because they’d accomplish little given ample liquidity available in the economy.

The economy grew at a weaker-than-projected 1.3 percent annual rate in the second quarter. Growth may pick up to a 2.1 percent pace in the third quarter, according to the median forecast of 53 economists surveyed by Bloomberg from Aug. 2 to Aug. 10. Economic growth at that pace isn’t strong enough to steadily drive down the unemployment rate, Bernanke has said.

Hiring also has weakened. Employers added an average 72,000 jobs in the three months through July, down from an average 217,000 in the prior three months. The unemployment rate dropped to 9.1 percent in July, from 9.2 percent, because thousands of people stopped looking for work.

The Fed’s pledge to keep interest rates low for two years probably won’t accelerate growth, Plosser said.

“What we did isn’t going to work,” he said. “Our problems are not problems easily addressed by monetary policy,” he said, adding that the Fed is “risking its credibility because it’s doing things that don’t work.”


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