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Plosser Says Fed Easing May Hurt Consumer Finance Repair

Federal Reserve Bank of Philadelphia President Charles Plosser said Fed stimulus may hurt attempts by consumers to repair their finances and fail to boost economic growth.

“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,” Plosser said in the text of remarks given today in Rochester, New York.

Fed officials are discussing how long they will purchase mortgage bonds and Treasuries as part of efforts to fuel the expansion and reduce 7.8 percent unemployment. The Fed linked its interest-rate outlook to economic thresholds last month, saying borrowing costs will stay low “at least as long” as joblessness exceeds 6.5 percent and if inflation is projected to be no more than 2.5 percent one or two years in the future.

Low interest rates encourage consumers to save “even more” and “large budget deficits” imply higher future taxes which also leads to more saving, Plosser said. His remarks were similar to those delivered in Somerset, New Jersey, on Jan. 11.

“Until household balance sheets are restored to a level that consumers and households find comfortable, consumption will remain sluggish,” Plosser said. “This is likely to take some time, and attempts to increase economic ‘stimulus’ may not help speed up the process and may actually prolong it.”

Plosser, who doesn’t vote on monetary policy this year, also said he sees medium-to-longer-term inflation risks “given the current stance and anticipated path of monetary policy.”

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