Fed’s Plosser Calls for Tapering of QE to Begin in September

Federal Reserve Bank of Philadelphia President Charles Plosser, who has opposed the Fed’s current round of asset purchases, said the central bank should begin tapering its $85 billion in monthly bond buying in September and end the unorthodox stimulus by year-end.

“I don’t want to do it all at once, but I think we should begin to taper very soon and hopefully end it by the end of this year,” Plosser said today in an interview in Jackson Hole, Wyoming. “That would be a healthy thing for the economy. We can do it gradually.”

Fed Chairman Ben S. Bernanke said last month the Fed is on track to begin reducing its bond buying later this year and halt the program by around mid-2014 if the economy performs in line with central bank forecasts. Plosser, who doesn’t vote on monetary policy this year, has repeatedly spoken out against additional easing by the Fed.

“I’d like for us to start in September” to taper the purchases, Plosser said in the Bloomberg Television interview with Michael McKee to air July 15. “We don’t want to create another housing boom,” and “we have to be careful of the unintended consequences of our policies.”

The Federal Open Market Committee on June 19 pledged to continue its current purchase pace for mortgage bonds and Treasuries, seeking to bolster U.S. growth and reduce unemployment. Many officials wanted to see gains in the labor market before reducing the pace of the monthly purchases, minutes of the June 18-19 gathering showed.

Halt Buying

At the same time, about half of the 19 participants in the FOMC wanted to halt bond buying by the Fed by year-end, the minutes said.

Treasuries fell today, erasing earlier gains. The yield on the 10-year Treasury note increased 1 basis point to 2.58 percent. The Standard & Poor’s 500 Index advanced 0.3 percent to 1,680.19.

The risks from the Fed’s so-called quantitative easing are growing with the size of its balance sheet, currently at $3.5 trillion, Plosser said. It will be “difficult” for the Fed to change course on policy, he said.

Speaking to reporters after giving a speech today, the Fed district bank chief said he would be “increasingly uncomfortable” if inflation continued to drop. He “would be fine” tapering both Treasuries and mortgage bonds, he said.

Financial Markets

“The most important thing is to begin to unwind” the asset-purchasing program and “focus” on communicating to financial markets that the Fed will keep rates low, he said.

In his speech today, Plosser said recent changes in the way the central bank explains its policy outlook have “likely caused more confusion than illumination.” Fed officials should make a clearer pledge to keep interest rates near zero as long as unemployment is above 6.5 percent and inflation is no more than 2.5 percent, he said in prepared remarks at the Global Interdependence Center’s Rocky Mountain Economic Summit.

Instead of emphasizing flexibility, central bankers should treat the guidance as “triggers rather than thresholds,” he said. “Effective forward guidance demands commitment.”

Plosser said he foresees the unemployment rate “approaching” 7 percent by year-end and 6.5 percent before the end of 2014. The jobless rate was 7.6 percent in June.

The Philadelphia Fed chief in 2011 dissented twice against FOMC decisions to add monetary stimulus.

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