Philly Fed's Plosser: Why I oppose Bernanke policy

Philadelphia Federal Reserve President Charles I. Plosser is scheduled to launch another attack at this hour against the Federal Reserve Board of Governors' policy, under chair Ben Bernanke, of buying mortgage-backed securities to keep interest rates low and encourage home purchases and hiring until the US unemployment rate drops significantly.

Plosser will address the Southern Chester County Chamber of Commerce at 12:30. UPDATE: Text now posted at Fed site here. Highlights from his prepared talk:

"While the unemployment rate is expected to remain elevated ... it is not at all clear that monetary policy can speed [new hiring] ...

"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.  None think that lowering nominal interest rates by a few basis points will alter their behavior ...

"As far as households are concerned, it seems unlikely that a small drop in interest rates will overcome the strong desire to save and, instead, induce households to spend more.  In fact, driving down interest rates 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 an action will help speed up the recovery risks the Fed's credibility.  This can be 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."

Plosser also warns that, when the economy eventually recovers, it will be harder for the Fed to boost rates than it was to cut, damaging the Fed's credibility and reducing the billions it has lately been able to pay the U.S. Treasury.

Plosser also questions the Bernanke Fed's decision to favor housing over other industries by buying mortgage-backed securities: "Central banks should refrain from allocating credit toward one sector or industry.  Those types of credit-allocation decisions rightfully belong to the fiscal authorities, not the central bank ...

"The Fed's most recent actions carry significant risks." Better, in Plosser's view, to let the economy keep recovering slowly, keep inflation low, and get the federal government to get its spending in line with its income.