Thu, Sep 27, 2012 - Page 15 News List

QE3 risks Fed credibility: Plosser

‘SIGNIFICANT RISKS’:The Philadelphia Fed president’s remarks that quantitative easing was risky and would not boost employment reversed an early rally on Wall Street

Bloomberg

Federal Reserve Bank of Philadelphia President Charles Plosser said new bond buying announced by the Fed this month probably would not boost growth or hiring and could jeopardize the central bank’s credibility.

“We are unlikely to see much benefit to growth or to employment from further asset purchases,” Plosser said in a speech on Tuesday at the district bank in Philadelphia. “Conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.”

The Federal Open Market Committee (FOMC) said on Sept. 13 that it would undertake a third round of quantitative easing by purchasing mortgage-backed securities at a pace of US$40 billion per month until labor markets “improve substantially.”

Policymakers are using unconventional tools to attack a jobless rate stuck above 8 percent since February 2009.

Economic research indicates that additional asset purchases are “unlikely to reduce long-term interest rates by a significant amount” and that lowering rates “by a few more basis points” would not spur growth and hiring, said Plosser, who does not have a vote on policy this year.

The US economy is growing “at a moderate pace” and probably will expand by about 3 percent next year and in 2014, he said.

His comments reversed an early Wall Street rally that had been fueled by upbeat data on consumer confidence and house prices. By the end of trade on Tuesday, the Dow fell 0.75 percent, the S&P 500 lost 1.05 percent and the NASDAQ shed 1.36 percent.

In Asia trading yesterday, Tokyo tumbled 2.03 percent, Sydney shed 0.26 percent and Seoul slipped 0.55 percent.

“I opposed the Committee’s actions in September because I believe that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment,” Plosser said. “Every monetary policy action has costs and benefits, and my assessment is that the potential costs and risks associated with these actions outweigh the potential meager benefits.”

The FOMC also said this month it would probably hold the federal funds rate near zero at least through mid-2015. The Fed had forecast since January that rates would stay low at least through late 2014.

In addition, the Fed said on Sept. 13 “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

The Fed’s “hard-won credibility” is crucial because if the public does not have confidence in policymakers, their ability to set effective monetary policy will be harmed, hurting households and businesses, Plosser said.

If people believe the central bank will delay raising rates, they may “infer that the Fed is willing to tolerate considerably higher inflation,” spurring an increase in inflation expectations that would require a response from the FOMC, Plosser said.

“The Fed’s most recent actions carry with them significant risks,” Plosser said. “I am not forecasting that those risks will necessarily materialize and I hope they will not, but if they do, they could prove quite costly to the economy.”

Plosser, 64, became president of the Philadelphia Fed in August 2006. He was previously dean of the graduate school of business administration at the University of Rochester in New York State. The Philadelphia Fed will next have a vote on policy decisions in 2014.

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