Fed's Plosser Floats Setting a Cap on QE3

Friday, 01 Nov 2013 08:24 AM

 

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A top U.S. Federal Reserve official on Friday floated the idea of setting a maximum dollar amount for its current bond-buying program, which is now tied to an improved job market.

"I'm actually leaning to believe that's a better way to get out of this," Philadelphia Fed President Charles Plosser said on CNBC television, adding a cap on quantitative easing would allow the Fed to reassess the economy once it is done.

"It would be worthwhile for us to consider how do we get out of this ... program in a sensible way without confusing it with our interest rate forward guidance."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

The U.S. central bank is buying $85-billion in Treasury and mortgage bonds in an effort to boost investment, hiring and growth. The program started in September, 2012 and is the Fed's third such quantitative easing (QE3) effort.

In part because of a 16-day government shutdown last month, the Fed decided this week to keep up the pace of QE3. In deciding when to reduce the program, the Fed has said it will watch that economic data support its expectation for improvement in the labor markets and higher inflation.

All of the asset purchases in the wake of the financial crisis have swelled the Fed's balance sheet to some $3.7 trillion, sowing concern over asset bubbles and worry that reversing the unprecedented easing effort will be painful.

Plosser, a hawk who does not vote on the Fed's policy committee this year, did not offer a possible cap for QE3.

He also warned that the Fed needs to be wary of allowing U.S. fiscal policy to drive monetary policy decisions.

"We could easily find ourselves in what some people describe as a fiscal dominance regime where monetary policy becomes totally driven by fiscal policy. That's not a good place," Plosser said on CNBC.

"I don't believe the shutdown is terribly consequential from an economic point of view in terms of the economy in the short run. It will have some economic effects but they will be small and it will be temporary."

He predicted the short-term economic effects of the government shutdown should be small, and added the central bank needs to be wary of allowing U.S. fiscal policy to drive monetary policy decisions.

Plosser said he expects a rise to 2.5 to 3 percent in gross domestic product growth next year.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

© 2014 Thomson/Reuters. All rights reserved.

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