Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank’s record stimulus risks a surge in inflation and may impair efforts by households to repair their finances.
“Attempts to increase economic ‘stimulus’ may not help speed up the process and may actually prolong it,” Plosser said in the text of a speech today in Somerset, New Jersey.
Policy makers are discussing how long they will keep buying mortgage bonds and Treasuries as part of efforts to boost growth and bring down a 7.8 percent unemployment rate. The Fed last month linked its interest-rate outlook to economic thresholds, saying borrowing costs will stay low “at least as long” as joblessness exceeds 6.5 percent and if projected inflation won’t go beyond 2.5 percent one or two years in the future.
“Efforts to drive real rates more negative or promises to keep rates low for a long time may have frustrated households’ efforts to rebuild their balance sheets without stimulating aggregate demand or consumption,” said Plosser, who doesn’t vote on monetary policy this year. He has repeatedly criticized Fed easing for risking higher inflation and jeopardizing the central bank’s credibility, and said the latest stimulus steps do little to boost growth.
Low interest rates reduce returns for savers and do little to encourage businesses to expand payrolls or invest in new ventures, Plosser said.
“Monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest until a significant amount of the uncertainty has been resolved,” he said. “Firms have the resources to invest and hire, but they are uncertain as to how to put those resources to their highest valued use.”
An increase in the benchmark interest rate is “conceivable” in 2014, Plosser said to reporters after the speech. Such a move would be a year earlier than the 2015 date Fed officials had announced before switching to thresholds for unemployment and inflation.
The move away from dates is a “step forward” in Fed communications, though may invite “a fixation” on specific unemployment and inflation reports rather than a broader view of economic data, Plosser said. The Fed shouldn’t change the numerical thresholds, a change that would be “terribly confusing,” he said.
The Fed is looking for evidence of distortions in financial markets that may stem from a lengthy period of low interest rates and asset purchases, the Philadelphia Fed chief said. Businesses need to be alert to accumulating too much risk from a potential rise in interest rates over time, he said.
Plosser also said he is encouraged by signs U.S manufacturing may pick up after a period of sluggish growth.
In response to audience questions, Plosser said he favored halting additional bond purchases because their benefits are “pretty meager” and “there are lots of risks” including disruptions in the economy.
“The more of these assets we have, the more complicated the exit strategy will be,” he said.
The Fed may need to slow or halt bond buying this year as the economy makes “modest progress,” Plosser said in a Bloomberg Television interview.
“Given where we are, I think I would not be surprised if we face the choice of having to rein in the purchases sometime during this year,” Plosser said in the broadcast interview.
U.S. stocks fell, after the Standard & Poor’s 500 Index advanced to a five-year high. The S&P 500 fell 0.1 percent to 1,470.99 at 11:57 a.m. New York time.
Plosser reiterated his view that unemployment will drop to near 7 percent by year’s end and the U.S. growth rate will pick up this year to about 3 percent, which he said was “at the high end” among Fed policy makers.
The U.S. economy may expand at a 2 percent pace in 2013 after a 2.3 percent gain last year, according to the median forecast among economists surveyed by Bloomberg News this month.
“Inflation expectations will be relatively stable and inflation will remain at moderate levels in the near term,” Plosser said. “However, with the very accommodative stance of monetary policy in place for more than four years now, we must guard against the medium- and longer-term risks of inflation.”
Inflation as measured by the personal consumption expenditures price index rose 1.4 percent in November from a year earlier. The Fed aims for price acceleration of 2 percent.