Plosser Says Tapering Delay Undermined Fed’s Credibility
Federal Reserve Bank of Philadelphia President Charles Plosser, an opponent of additional stimulus, said the Fed’s decision last month not to taper its asset purchases undermined the central bank’s credibility.
“To delay tapering of our current asset purchase scheme without clear and significant departures from prior guidelines suggested the FOMC was changing the goalposts and deviating from June’s forward guidance,” Plosser said today in a speech in Johnstown, Pennsylvania, referring to the policy-setting Federal Open Market Committee. He doesn’t vote on the panel this year. “This undermines the credibility of the committee and reduces the effectiveness of forward guidance as a policy tool.”
The FOMC last month pressed on with bond purchases of $85 billion per month, awaiting further signs the economy will grow quickly enough to bring down 7.3 percent unemployment. Economists in a Bloomberg survey before the meeting predicted the Fed would cut the pace of monthly purchases to $80 billion.
The Fed’s decision to press on with stimulus “contributes to additional uncertainty regarding the future course of monetary policy,” Plosser said.
U.S. stocks fell, with the Standard & Poor’s 500 Index poised for its biggest two-day loss since August, as congressional leaders said the other party must move to resolve the government shutdown and avoid a debt default.
“Chances are the effects of that are going to be transitory,” Plosser said in response to audience questions about the shutdown. “They’re not going to be positive but they’re going to go away eventually.”
While some of his colleagues on the FOMC have voiced concern about the lack of government economic data, Plosser said the Fed is “not really flying blind” as long as the shutdown doesn’t drag on. Policy makers can gather anecdotal economic data and receive reports from private firms, he said.
The Fed can do little in response to the federal budget deadlock, he said.
“Monetary policy can’t alleviate that uncertainty about fiscal policy,” he said. “We can’t solve that problem. We can’t make the public more confident about fiscal policy by conducting monetary policy.”
The Fed added another layer of confusion in financial markets with its decision to refrain from tapering, Plosser said to reporters after his speech.
“We certainly let people continue to believe over the course of the summer” that the Fed would taper its purchases in September, he said. “It was a pretty good bet we were going to do this,” and policy makers “didn’t push back on that growing consensus.”
Economic data didn’t change sufficiently to warrant backing off from the signals that a reduction of asset purchases was imminent, Plosser said.
“The decision not to begin tapering our asset purchases was also read in some quarters as a sign that the FOMC had become much less confident that growth would be sustained in the manner the Committee envisioned in June,” he said to the Greater Johnstown Cambria County Chamber of Commerce. “Thus, we undermined our own credibility as well as the public’s confidence in the economy.”
The economy will probably grow around 2.5 percent this year, accelerating to 3 percent next year, he said. The unemployment rate should fall by the end 2013 to around 7 percent, and decline to 6.25 percent by the end of next year, he said.
“Based on this outlook and the improvement in labor market conditions, I believe it would be appropriate for the Fed to begin to reduce the pace at which we are expanding our balance sheet and to bring the purchase program to a close,” he said. “We missed an excellent opportunity to begin this tapering process in September.”
Plosser, 65, became president of the Philadelphia Fed in August 2006. Fed presidents rotate voting on monetary policy with Plosser voting next year.
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