Tags: Plosser | Fed | Low | Rate

Plosser: Fed's Low Rate Pledge ‘Inappropriate’

Wednesday, 17 Aug 2011 10:15 AM

 

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The Federal Reserve's recent promise to keep rates low for another two years was "inappropriate policy at an inappropriate time," while its statement on the economy was excessively negative, a top Fed policymaker said on Wednesday.

Philadelphia Federal Reserve President Charles Plosser said he dissented from the Fed's statement because policy should be determined by what the economy is doing rather than by a fixed timeline.

"It was inappropriate policy at an inappropriate time," Plosser told Bloomberg Radio.
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"Policy shouldn't be dependent on the calendar, it should be dependent on the economy," he later added.

The Fed in a statement last week pledged to keep interest rates low for at least two more years and said it would consider further steps to help growth.

Plosser was one of three dissenters from the Fed's decision, who wanted to avoid any specific time reference on the low-rates pledge.

At the same time, the central bank gave a gloomy picture of the economy, saying that growth was proving considerably weaker than expected, inflation should remain contained for the foreseeable future and U.S. unemployment, currently at 9.1 percent, would come down only gradually.

"I thought the statement that described the state of the economy was excessively negative. Confidence is not strong ... a very downbeat description of the economy would not do much to engender confidence in the business community or the consumer community," said Plosser.

The noted policy hawk said that although U.S. economic data had been weak in the first half of the year, reports in the last part of July contained good signals, including a recent decrease in first-time weekly claims for jobless benefits.

In an hour-long interview, Plosser said that while inflation expectations were still contained, the Fed needs to guard against the possibility of a sudden shift upward.

"Personally, I believe we're going to have to raise rates well before mid-2013," Plosser said.

"I don't know when that date will be, but it's unlikely to be two years from now, at least from my perspective."

The Fed cut overnight interest rates to near-zero in December 2008 and has bought $2.3 trillion in government and mortgage-related bonds to help the economy.

There is plenty of doubt as to what more the Fed can do to stimulate the economy with rates already so low. Plosser noted it is not the Fed's role to act if fiscal policy is unable to.

"I think it's a big mistake for policymakers, either inside the Fed or other places, to believe that if fiscal policy is hamstrung for one reason or another, the Fed has to act," he said.

"We run the risk of not being able to deliver on the things people want us to do because we can't, and then when we try, we fail and our credibility is at risk."

Slower economic growth in 2011 so far has raised speculation the Fed will embark on another round of bond buying to shore up the recovery. Known as quantitative easing, such a move would likely meet political opposition both domestically and abroad.

Indeed, Texas Governor and presidential candidate Rick Perry said earlier in the week he would consider it "treasonous" if Fed Chairman Ben Bernanke "prints more money between now and the election".

Asked about Perry's comments, Plosser said it was important for the Fed to maintain its independence and for the public to know about the internal debate that goes on.

"We are asking often times the same question the public is asking. We're struggling with exactly the same questions and making that known is an important part of being transparent and building confidence in the institution."

© 2014 Thomson/Reuters. All rights reserved.

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