Central Banks

Thursday, September 29, 2011 - 12:04

Fed's Plosser Q&A: Not Sure Much 'Monetary Medicine' Left


VILLANOVA, Pa. (MNI) - Philadelphia Federal Reserve President Charles Plosser Thursday said that there is not much monetary policy can do to fix the current stagnation in the U.S. economy.

"I'm not sure there's much monetary medicine" available to policy makers, he said. "I've come to believe that the public, the market and many people have come to expect too much from monetary policy."

Plosser said monetary policymakers in the U.S. and overseas have "done a lot of things out of the ordinary" to stimulate economies since the 2008 financial crisis and may have undermined their own credibility by taking actions that he called "fiscal policy-like actions"

Plosser, who dissented from recent FOMC actions to keep interest rates near zero until 2013 and to buy $400 billion in long-term Treasury securities in exchange for shorter-term bonds, repeated his opposition to those actions.

In comments to reporters after a speech to business leaders at Villanova University, Plosser said the Fed is limited in what more it can do to stimulate an economy that is mired with high unemployment and declining growth.

But the central bank stands ready take "appropriate action" if the European debt crisis disrupts the financial markets, or if inflation rises above current expectations.

He repeated his recent criticism of the Fed's decision to keep interest rates very low until 2013, saying that the Fed needs the flexibility to respond to evolving economic conditions, and should not tie policy to a specific timetable.

"The calendar is the wrong thing to condition policy on," he said.

If inflation rose to 3% or 4% in 2012, the Fed is likely to raise interest rates then despite its pledge to keep rates low until 2013, he said. Under those conditions, "I think the answer to that is we probably would," he said.

But 2012 inflation is likely to be 2% or "maybe a little bit more," Plosser said.

"I'm not concerned about inflation so much in the near term," he added. "If inflation continues to drift up then it becomes a cause for concern and we might have to start ratcheting up the forecast. I haven't done that yet and hopefully we won't have to."

He urged the Fed and other central banks to pull back from what he called "very interventionist activities" in the interests of restoring their own credibility in the eyes of the markets and the public following a succession of actions designed to stimulate economies during the economic downturn.

"We all face a challenge of how to restore the integrity of central banks, restore their independence," he said.

"The more central banks become engaged in fiscal policy-like actions, the difficulty is not doing them, the difficulty is what that means for the future. We need a much brighter line between monetary and fiscal policies," he said.

Asked whether the U.S. may slip into a period of inflation even while unemployment is high, akin to the "stagflation" of the 1970s, Plosser said, "I think it's a risk. That's not my forecast but we need to be careful that we don't inadvertently slip into that."

He repeated his call for Fed policy to work toward a specific inflation target, and said Chairman Bernanke "wholeheartedly" agrees with that objective.

** Market News International **

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