Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed shouldn’t regularly use its balance sheet to conduct monetary policy because such moves threaten its independence.
“Our balance sheet should not be viewed as a new independent instrument of monetary policy in normal times,” Plosser said in the text of a speech in Paris today. “Clear boundaries and resisting the use of the balance sheet as a new policy tool would also improve fiscal discipline by making it more difficult for the fiscal authorities to resort to the printing press as a solution to unsustainable budget policies.”
The Fed, aiming to reduce borrowing costs and spur growth, has bought $2.3 trillion of bonds in two asset-purchase programs, and is pursuing a maturity-extension program announced in September to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries. The central bank has also held its benchmark interest rate near zero since December 2008.
“The Fed and other central banks have undertaken other actions that have blurred the distinction between monetary policy and fiscal policy, such as adopting credit policies that favor some industries or asset classes relative to others,” Plosser said. “Establishing and maintaining clear boundaries between monetary and fiscal policies protects the independence of the central bank and its ability to carry out its core mandate -- maintaining price stability.”
The Philadelphia Fed chief cited the central bank’s establishment of emergency credit facilities during the credit crisis to support the commercial-paper and asset-backed securities markets, and its purchases of mortgage-backed debt to bolster housing as examples.
“These credit allocations have not only breached the traditional boundaries between fiscal and monetary policy, they have generated pointed public criticisms of the Fed,” Plosser said.
“Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline,” he said.
Plosser didn’t comment in the text of his speech on the outlook for the U.S. economy.