Tags: Plosser | Fed | inflation | Risk

Plosser Says Fed Fiscal Policy Role Raises Inflation Risk

Friday, 02 December 2011 02:49 PM

Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank has undertaken actions that should be conducted by the U.S. Treasury and risk fueling public expectations that inflation will accelerate.

“Unfortunately, from my perspective, the Fed and other central banks have already embarked on a path that has blurred the distinction between monetary policy and fiscal policy,” Plosser said today in a speech in Philadelphia.

Plosser’s remarks come two days after the Fed and five other central banks cut in half the premium on currency swap agreements. The action sparked a global rally in stocks on optimism it will help Europe overcome its debt crisis.

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U.S. stocks continued their rally today after a report that the unemployment rate dropped to 8.6 percent, the lowest level since March 2009. The Standard & Poor’s 500 Index rose 0.5 percent to 1,250.67 at 12:37 p.m. in New York.

“Once a central bank ventures into conducting fiscal policy it may find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions,” Plosser said. “This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving price stability.”

The Fed on Nov. 30 joined with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K. to cut the pricing on dollar liquidity swaps. Plosser did not mention the program specifically in his remarks.

Voted in Favor

The Federal Open Market Committee voted 9-1 in favor of the action at a meeting before the announcement. Plosser was unavailable for the meeting and Richmond Fed President Jeffrey Lacker voted instead.

Plosser told reporters after his speech that he was “not privy” to the discussion the Fed held before voting and would not “make judgments without hearing all the sides.” Plosser noted that the swaps themselves were a program he supported in the past and that there is “not much monetary policy can do about Europe.”

Lacker dissented from the decision, saying in a statement after that “such lending amounts to fiscal policy, which I believe is the responsibility of the U.S. Treasury.”

Plosser said he did back efforts by the Fed to communicate more clearly with markets and the public. He said he supported efforts including FOMC members’ projections for the path of interest rates along with their forecasts for the economy that are released four times a year.

Transparent on Policy

This would be “a better way for the committee to communicate more clearly to the public about how the committee thinks,” Plosser said. A communications change shouldn’t be a method to ease monetary policy, but a way to “be transparent about how policy is being conducted,” he said.

Today’s report that the economy added 120,000 jobs and the unemployment rate fell to 8.6 percent is a sign that the “labor market is in fact healing,” Plosser said.

The Fed in recent years ventured into fiscal policy in other programs “with the sincere belief” that targeted lending plans such as those that were created after the September 2008 bankruptcy of Lehman Brothers Holdings Inc., “were absolutely necessary to address the challenges posed by the financial crisis,” he said.

“Instead of the central bank engaging in this credit policy, the federal government could carry out these transactions by issuing Treasury debt to support lending to the targeted markets or firms,” Plosser said. He cited existing credit allocation programs such as “‘green energy’ loans, small business loans and subsidized home mortgages.”

Two Dissents

Plosser, 63, has dissented twice this year from monetary policy decisions, joining Dallas Fed President Richard Fisher and Narayana Kocherlakota of Minneapolis in opposing a September plan to sell $400 billion of short-term Treasury securities and buy $400 billion of longer-term securities.

The policy, so-called Operation Twist, is “an action that could just as well have been conducted by the U.S. Treasury,” Plosser said. The three bank presidents also opposed the Fed’s August pledge to hold interest rates near zero through at least mid-2013.

“Central banks and monetary policy are not and cannot be real solutions to the unsustainable fiscal paths many countries currently face,” Plosser said. “Proponents who believe otherwise are skating on thin ice.”

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Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank has undertaken actions that should be conducted by the U.S. Treasury and risk fueling public expectations that inflation will accelerate. Unfortunately, from my perspective, the Fed and...
Friday, 02 December 2011 02:49 PM
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