Federal Reserve Bank of Philadelphia President Charles Plosser said the potential risks involved with another round of large-scale bond buying outweigh the benefits.
“I don’t think it really meets the cost-benefit test right now,” Plosser, who doesn’t have a vote on policy this year, said today in a CNBC interview. “It’s possible they could bring down interest rates somewhat, but we have to remember it’s not that simple given the headwinds that the economy faces.”
The Fed has expanded its balance sheet with two rounds of bond purchases, known as quantitative easing. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.
“Increasing accommodation creates risks, and we need to balance those,” Plosser said in an interview from the Fed symposium in Jackson Hole, Wyoming. “We have to take into account the size of the risk we are taking, and the size of the balance sheet is a risk.”
Uncertainty caused by the U.S. elections and Europe’s debt crisis are making consumers and businesses reluctant to spend and invest, and “monetary policy isn’t going to remove those headwinds,” Plosser said.
Fed Chairman Ben S. Bernanke, who speaks on monetary policy tomorrow in Jackson Hole, and the Federal Open Market Committee will discuss at the next meeting Sept. 12-13 how to boost economic growth that’s too weak to cut unemployment. Policy makers said at the last meeting that more action may be needed “fairly soon” without evidence of a “substantial and sustainable” recovery, the minutes released Aug. 22 showed.
Plosser, 63, became president of the reserve bank in August 2006 following a career in academia. He was previously dean of the graduate school of business administration at the University of Rochester in New York State. The Philadelphia Fed will get its next vote on policy decisions in 2014.