Federal Reserve Bank of Philadelphia President Charles Plosser, an opponent of bond purchases by the Fed, said policymakers should not try to make up for a permanent loss in potential growth caused by the financial crisis.
“Efforts to use monetary policy to offset such permanent shocks and to close what appears to be a gap will likely be ineffective and perhaps even counterproductive,” Plosser said on Saturday in a speech in Philadelphia.
“The real economy must ultimately adjust to such permanent shocks,” he said to the Korea-America Economic Association. “Monetary policy cannot offset the costs or the necessity of such real adjustments.”
Photo: Bloomberg
Plosser, who votes on monetary policy this year, opposed the Fed’s second and third round of bond buying, saying they increased a risk of future inflation while doing little to boost growth. In contrast, Boston Fed President Eric Rosengren, speaking at the same conference, said policymakers should not rush to cut stimulus with inflation below their 2 percent goal.
Consumer prices rose 0.9 percent in November last year from a year earlier, according to an inflation measure watched by the Fed.
The Federal Open Market Committee (FOMC) last month trimmed its monthly bond purchases to US$75 billion from US$85 billion, taking the first step toward unwinding the unprecedented stimulus that Fed Chairman Ben Bernanke put in place to spur growth.
“It was the right move,” Plosser said to reporters. “I would have liked to have done it sooner, but I’m pleased that we have taken this step in the right direction.”
Plosser said he favors tapering bond purchases at a faster pace than US$10 billion per meeting.
“There’s no reason we shouldn’t consider speeding the process up,” he said. “I have no problem with sort of gradually unwinding it, but my preference would be to move a little quicker and end it sooner rather than later.”
He said in his speech that an enduring loss in wealth and output would help to explain why US growth has fallen short of the Fed’s forecasts since the recession ended in June 2009. His comments echoed the view of St. Louis Fed President James Bullard, who in September 2012 said growth may not return to “the bubble-induced, pre-crisis path” because of a permanent loss of wealth.
Rosengren, who cast the lone dissent last month against a Fed decision to taper bond buying, argued against a rapid wind-down in stimulus, noting that the Fed is falling short on its mandate to ensure price stability and full employment.
“With the inflation rate below target and the unemployment rate significantly above target, we believe strongly that monetary policy makers have the opportunity to be patient in removing accommodation,” Rosengren said at the annual meeting of the American Economic Association. “This was one of the motivations for my dissenting vote.”
Policymakers — scheduled to meet on Jan. 28 and Jan. 29 — will probably reduce purchases in US$10 billion increments over the next seven meetings before ending them in December, according to a Bloomberg News survey of economists after the FOMC announced its tapering on Dec. 18. The Fed through bond buying has expanded its balance sheet to US$4.02 trillion.
“Even if we were not significantly undershooting our inflation target, there would still be a significant argument for monetary policy remaining highly accommodative,” said Rosengren, who does not vote on policy this year.
Federal Reserve Bank of New York President William Dudley, speaking during a panel discussion, said more work is needed to explain how bond buying by the Fed has helped support the recovery.
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