Tags: Fed | Plosser | Policy | Jobless

Fed's Plosser: Tying Monetary Policy to Jobless Rate ‘Very Dangerous’

By Newsmax Wires   |   Thursday, 27 Sep 2012 08:24 AM

Keeping U.S. monetary policy extraordinarily loose until the jobless rate hits a defined level could be very dangerous, Philadelphia Fed President Charles Plosser said on Thursday.

"Tying policy to an unemployment rate, a specific unemployment rate, can be very risky and very dangerous," Plosser said in an interview with Bloomberg TV.

Two other heads of regional Fed banks — Narayana Kocherlakota of the Minneapolis Fed and Chicago Fed President Charles Evans — have proposed keeping rates low until employment falls to specific levels, as long as inflation stays under control.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

Plosser, an inflation hawk, also told Bloomberg TV that the Fed was ready to act to counter risks from Europe's debt crisis but the nature of any such action would depend on what happens.

Plosser is not a voting member on the policy-setting Federal Open Market Committee this year.

Meanwhile, Plosser said policy makers are monitoring Europe’s debt crisis and are prepared to act should officials in the region prove unable to contain its spread.

“The Fed is watching Europe very carefully and the consequences of that, how that will play out if Europe suffers a financial crisis for some reason,” Plosser said. “We are prepared to respond.”

Spanish 10-year bond yields rose above 6 percent Wednesday, climbing by the most in two months, as Prime Minister Mariano Rajoy defied anti-austerity protesters with a plan to cut the deficit by at least 18 billion euros ($23.2 billion) next year. Police in Athens dispersed protesters with tear gas this week.

Plosser also reiterated comments from his Sept. 25 speech in which he said new bond buying announced by the Fed this month probably won’t boost growth or hiring and may jeopardize the central bank’s credibility. Policy makers said Sept. 13 that they’ll begin a third round of quantitative easing by purchasing mortgage-backed securities at a pace of $40 billion per month until labor markets “improve substantially.”

“We’re in uncharted territories, not just for monetary policy but for our economy and the kind of headwinds we’re facing,” said Plosser, who doesn’t vote on policy this year. “There’s plenty to keep you up at night.”

The policy-setting Federal Open Market Committee is using unconventional tools to attack a jobless rate stuck above 8 percent since February 2009. The FOMC also said this month it will probably hold the federal funds rate near zero at least through mid-2015. The Fed had forecast since January that rates will stay low at least through late 2014.

Keeping the central bank’s main interest rate near zero since December 2008 is “an extraordinary state of affairs,” and policy makers are “frustrated” because the economy still isn’t doing well, Plosser said.

The world’s largest economy grew less than previously forecast in the second quarter, the Commerce Department said Thursday. Gross domestic product expanded at a 1.3 percent pace in the second quarter after growing at a 2 percent rate from January through March. The revision, the third estimate for the quarter, compared with a prior estimate of 1.7 percent.

Before announcing QE3 this month, the Fed expanded its balance sheet with two prior rounds of bond purchases. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasurys. In the second round, announced in November 2010, the Fed bought $600 billion of Treasurys.

“The risks and the costs might be very much higher than whatever small benefits we get,” Plosser said Thursday. “If it doesn’t work, we risk the credibility of the institution.”

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.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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