Tags: Fed | Plosser | QE | Complicate | Withdrawal | Stimulus

Fed’s Plosser: QE2 Will Complicate Withdrawal of Stimulus

Thursday, 02 December 2010 01:37 PM

Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank’s program to expand its assets by $600 billion will hinder future efforts to withdraw stimulus and avert a rise in prices.

“One cost of expanding the Fed’s balance sheet is that it will complicate our exit strategy from a very accommodative monetary policy, when that time comes,” Plosser said in remarks prepared for a speech today in Rochester, New York.

Policy makers led by Chairman Ben S. Bernanke plan to meet in Washington on Dec. 14 to review a program to buy Treasury securities to spur growth and keep inflation from falling too low. Such “quantitative easing” may provide stimulus for too long, fueling inflation, Plosser said to a seminar sponsored by the University of Rochester’s Simon Graduate School of Business.

“Even with the best of intentions, if we don’t act aggressively and promptly, we may find ourselves behind the curve and at risk for substantial inflation,” he said. “The Fed is developing and testing tools to help us prevent such a rapid explosion in money.”

Plosser said before the Fed’s Nov. 3 meeting that he didn’t support expansion of the balance sheet. Today he said he’s “still somewhat skeptical that we will see much of a stimulative effect from the new round of purchases.”

“It is not clear to me that a further reduction in long- term interest rates will do much to speed up the reduction in the unemployment rate to more acceptable levels,” Plosser said. If the purchases do not increase growth by much, “then the argument that the program will reduce the risks of deflation is also substantially weakened.”

Dubbed QE2

Other Fed policy makers have expressed concerns about the purchases, dubbed QE2 for the second round of quantitative easing. Fed Governor Kevin Warsh said he was “less optimistic than some” about the program’s benefits, and Richmond Fed President Jeffrey Lacker told reporters last month that he “thought the risks exceeded the benefits” from further easing.

The Fed’s decision to undertake new bond purchases sparked a political backlash in Washington. Last month, two Republicans, Tennessee Senator Bob Corker and Indiana Representative Mike Pence, proposed removing the Fed’s full employment mandate to focus the central bank on stable prices alone. Corker plans to introduce legislation next year.

At its November meeting, the Fed said “the pace of recovery in output and employment continues to be slow” and that household spending remains constrained by “high unemployment, modest income growth, lower housing wealth, and tight credit.”

Costs, Benefits

Plosser said today that “if we do not see these benefits, I would not infer that we merely need to increase the size of the program. Rather, I would take this as evidence that we need to rethink the analysis of costs and benefits that led us to this policy in the first place.”

The Fed’s Beige Book anecdotal survey of business contacts, released yesterday, said the economy gained strength across much of the U.S. as hiring improved, manufacturing expanded and retailers anticipated a stronger holiday shopping season.

“History has taught us that recoveries are rarely a smooth upward trajectory,” he said. “Yet, the most recent data suggest that the economy is emerging from the summer doldrums.”

Plosser’s district, which does not include Rochester, reported “mixed” economic conditions in recent weeks. The outlook of the business community in the Philadelphia Fed district “remained lackluster in November,” the Fed’s report said.

Plosser said that while inflation is low, “it does not follow that sustained deflation is imminent or even likely.”

He said he expects growth to pick up to 3 percent or 3.5 percent over the next two years, and that unemployment will fall to 8 percent to 8.5 percent by the end of next year.

Fed presidents rotate voting on monetary policy with Plosser, 62, voting next year.

--Editors: James Tyson, Kevin Costelloe

To contact the reporters on this story: Joshua Zumbrun in Rochester, New York at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.ne

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Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank s program to expand its assets by $600 billion will hinder future efforts to withdraw stimulus and avert a rise in prices. One cost of expanding the Fed s balance sheet is that it will...
Thursday, 02 December 2010 01:37 PM
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