Does Fed's Charles Plosser speak for Philly?
Philly Fed president says Bernanke is cutting rates too low
Does Fed's Charles Plosser speak for Philly?
Joseph N. DiStefano
Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia (reports to a board headed by veteran lender turned William Penn Foundation head Jeremy Nowak, vice-chair is Swarthmore Group investor James Nevels, also includes executives from Comcast, Sunoco, Mannington Mills, UDel and three PA banks), said in a speech to investment analysts today that he opposes Fed chairman Ben Bernanke's latest low-interest-rate policy. Plosser is more worried by possible inflation, the growing federal deficit, and the Fed's "credibility," than by high unemployment, which he says is slowly coming down. Read his speech here. Highlights: "I opposed the Committee’s actions in September because I believe that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment. ... The potential costs and risks associated with these actions outweigh the potential meager benefits.
"Given the magnitude and nature of the shocks that hit our economy, one should not be particularly surprised by the slow recovery ... While unemployment is expected to remain above FOMC participants’ range of estimates of its longer-run level for some time, it is not at all clear that monetary policy can speed up that transition... "Given our current economic situation and my reading of the empirical evidence, I do not believe that lowering interest rates by a few more basis points will spur further growth or higher employment. "Business leaders who have talked to me continue to cite uncertainty about fiscal decisions — here and abroad — as the greatest hindrance to hiring and investment. Hopefully these uncertainties will abate over time, but the central bank can do little to alleviate them...
"As far as households are concerned, they continue to try to repair their balance sheets ... They are [paying down loans] and saving more. "It seems unlikely that a small drop in interest rates will overturn the strong desire to save and, instead, induce households to spend more. In fact, driving down interest rates even further may encourage consumers to save even more to make up for lower returns.
"Thus, in my view, we are unlikely to see much benefit to growth or to employment from further asset purchases. If I am right, then conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.
"This is quite costly: If the public loses confidence in the central bank, our ability to set effective monetary policy in the future will be harmed and households and businesses will feel the consequences... The rationale... depends on the Fed’s ability to convince the public that it will conduct policy in a fundamentally different way than it has in the past. People must believe that we will delay raising interest rates compared to when we normally would and, by so doing, make the economy stronger than it otherwise would be... "If the public doesn’t believe that we will delay raising rates, they won’t bring spending forward and the policy will be ineffective. "But if they do believe we will delay raising rates, they may infer that the Fed is willing to tolerate considerably higher inflation. This may spur an increase in inflation expectations, which would require a response from the FOMC, or else risk the credibility of its commitment to keep inflation low and stable.
"I do not think it prudent to risk that hard-won credibility. The subtlety and complexity of successfully managing expectations in this manner make this quite a risky policy strategy in my view, with little evidence of quantitatively meaningful results for employment...
"Central banks tend to find it easier to lower interest rates than to raise them...This time, [raising rates] will be even more complicated and risky. With such a large balance sheet, our transition from very accommodative policies to less accommodative policies will involve using tools we have not used before, such as the interest rate on reserves, term deposits, and asset sales. "Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation ... "A rapid tightening of monetary policy may also entail political risks for the Fed ... We may be unable to make any remittances to the U.S. Treasury for some years ... "The larger the Fed’s portfolio becomes, the higher the risk and the potential costs...
"Will the FOMC tighten quickly? Or slowly? How will the Committee decide? ... "I also opposed September’s decision to purchase additional mortgage-backed securities. In general, central banks should refrain from preferential support for one sector or industry over another...
"Prospects for labor markets will continue to improve only gradually. I believe inflation expectations will be relatively stable and inflation will remain at moderate levels in the near term. However, with the very accommodative stance of monetary policy in place for nearly four years, we must guard against the medium- and longer-term risks of inflation and the further distortions such accommodation can create ... "A common error in policymaking is an excessive focus on the short term and an underestimation of the longer-term consequences of policy choices. I take the longer-term risks I have outlined today quite seriously. In my view, the potential costs outweigh what appear to be meager potential benefits."
truer words could not be spoken.— ald- Wow. How did the truth break through the Bernanke-loving media?— barneygoogle
The basis of Plosser long term fear analysis is bank lending will flood money into the economy, WHEN the economy recovers. This torrent of loans will face the countervailing response of the Fed, "the Fed will need to withdraw accommodation very aggressively in order to contain inflation ..". And how will the Fed contain inflation, by inflating the interest rates! That will dampen demand! Of course, what is a bad loan today, will not become a good loan tomorrow, when the economy recovers, or else the banks would simply lend today. The real problem for banks, is not all the reserves they have, but how much of their own capital they put at risk, to expand the pool of bankable loans! The Fed is flooding the bank with money, so they are not constrained there, they are constrained by regulatory structures which requires them to put up a greater percentage of capital than they are willing to. They banks are in love with high leveraged deals, not a good economy with high employment levels. They are making more money than god with their London whales and derivative bets, that they don't need the middle class to lend to anymore, they have their own sovereign economy backed by the Fed. Inflation will never come back until wages come back. Until then, prices will not be pushed up by demand because demand is not fueled by a "recovered" economy larded with suppressed wages and benefits, stripped of pensions. Disposable income is a thing of the past as every penny must go into saving for retirement, and medical co-pays. The only thing that will explode will be the billionaires' net worth, which is doing spectacular now, you can only imagine how well it will do in the future. Perhaps Mr Plosser worries about the inflated prices of lear jets and Rolls Royces?
