Tags: fed | plosser | bernanke | easing

Ahead of Bernanke Speech, Fed's Plosser Notes Risk of More Easing

Thursday, 30 August 2012 05:44 PM

Monetary stimulus tools such as quantitative easing — asset purchases from banks — pose too much risk down the road and will produce little benefit today, said Federal Reserve Bank of Philadelphia President Charles Plosser.

Since the 2008 financial meltdown, the Fed has rolled out two rounds of quantitative easing, with a first round involving the purchase of $1.7 trillion in mortgage-backed securities from banks just after the 2008 financial crisis and a second round in 2011, which involved the purchase of $600 billion in Treasury holdings.

Such policies — designed to push down interest rates and encourage investing and borrowing — won't spur recovery in that they won't get consumers to spend or businesses to invest.

Both parties want to do the opposite right now.

Consumers want to save and pay down debts while businesses want to ride out uncertainty surrounding the elections, fiscal imbalances due to arise next year, regulations and the European debt crisis, putting off investing in the process.

"So the consumer wants to save, doesn't want to spend, businesses don't want to invest because they're facing uncertainty, and both of those head winds are not something that monetary policy can fix," Plosser told CNBC in an interview Thursday. Fed Chairman Ben Bernanke is scheduled to address a Fed symposium in Jackson Hole, Wyoming, on Friday, and markets hope to hear hints on where the central bank is headed next.

"Monetary policy does not create wealth. All we can do at best is try and rearrange it a little bit and even that's hard to do, and under the circumstances we are facing now, it's particularly difficult for monetary policy."

Monetary stimulus, meanwhile, poses risks down the road, namely inflationary pressures that can rise once the economy picks up.

"There is the risk of when all of the excess reserves in the economy begin to flow out, that's when the risk of inflation will materialize," Plosser said.

"We don't know how quickly we'll have to reverse course, but the consequences of that in itself may bring on a recession."

“Monetary policy is at an extraordinary level of accommodation never before seen in history and there are unintended consequences we are likely to face,” Plosser added.

Quantitative easing draws swift reaction especially from markets in that mere talk of it can send the dollar weakening and stocks and gold rising.

Some Fed officials favor not only more easing but on top of that, more open-ended rounds of easing, meaning the Fed should intervene for as long as it takes and not announce a fixed amount of assets it plans to purchase as was the case with previous rounds or quantitative easing.

Without such accommodative monetary policy, unemployment rates will hover around current levels of 8.3 percent and the economy will remain stuck in the doldrums, said Chicago Federal Reserve Bank President Charles Evans.

"I don't think we should be in a mode where we are waiting to see what the next few data releases bring," Evans told a seminar at the Hong Kong Bankers Club, according to Reuters.

"We are well past the threshold for additional action; we should take that action now."

Other Fed members have adopted more wait-and-see approaches, pointing out that the economy remains weak though it is growing, while easing measures tend to carry diminishing returns.

"There are benefits to further monetary policy actions, but we have to be realistic about what those benefits will be, how large those benefits will be, and how other factors will help or hinder the effectiveness of those benefits," said Cleveland Fed President Sandra Pianalto, Reuters added.

"We remain in a frustratingly slow economic recovery."

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Thursday, 30 August 2012 05:44 PM
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