Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said the Fed will probably need to raise interest rates before mid-2013 and that policy makers should have waited to see how the economy performed before pledging to hold rates at record lows for two years.
“It was inappropriate policy at an inappropriate time,” Plosser, 62, said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. Plosser spoke in his first interview since he dissented from a Fed decision on Aug. 9 to step up stimulus for an economic recovery that’s “considerably slower” than anticipated.
The economy may not need additional monetary stimulus, with inflation rising and unemployment declining since November to 9.1 percent, he said. Plosser hasn’t significantly cut his forecast for 2012 economic growth as the impact from “shocks” like the earthquake in Japan subsides, he said in an interview in New York with Bloomberg News editors and reporters.
Plosser, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis opposed the Fed’s commitment to hold the benchmark interest rate at a record low near zero until at least mid-2013, saying they preferred to maintain a low-rate pledge for an unspecified “extended period.” The last time three policy makers dissented was in November 1992.
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. He also said he is concerned that inflation will accelerate in 2012 and 2013.
The Standard & Poor’s 500 stock index fell 0.1 percent to 1,191.50 at 3:02 p.m. in New York, while yields on 10-year Treasuries fell to 2.174 percent from 2.22 percent yesterday.
The Fed 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. Still, he said he is concerned investors may interpret the decision as a reaction to equities.
Fisher said today the central bank shouldn’t ease monetary policy whenever there is a big drop in U.S. stock prices, an action he said some traders might view as a “Bernanke put.”
“My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors,” Fisher said today in a speech in Midland, Texas. “I believe my FOMC colleagues share this view.”
Lifeline for Economy
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, Plosser said.
It’s “a big mistake for policy makers inside the Fed to believe if fiscal policy is hamstrung that the Fed has to act,” he said. “That is not a good reason to act.”
The Federal Open Market Committee 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.
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 turmoil in financial markets.
“Clearly we would have to respond as lender-of-last-resort,” and “that might include more bond purchases,” Plosser said, adding he doesn’t foresee such a crisis happening.
The economy grew at a weaker-than-projected 1.3 percent annual rate in the second quarter, a July 29 government report said. Growth in the prior quarter slowed to a 0.4 percent pace. It was the weakest three-month period since the recovery began in June 2009.
Growth is expected to 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, the Fed said on Aug. 9. 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.”