Republican Congressmen dissatisfied with the direction of the Federal Reserve under Chairman Ben Bernanke may start looking to Philadelphia Fed President Charles I. Plosser for guidance as he keeps sniping at the chairman's attempts to boost the economy:
"Some have suggested that it is counterproductive for policymakers to express differing opinions, as it confuses markets and creates uncertainty;" but "the uncertainty is real," and "the central bank owes the public clear communications and as much transparency as is feasible... For policymakers to project a false sense of certainty would fail the test," argues Plosser, in a speech to the Philadelphia chapter of the Risk Management Association this morning.
Plosser went on use that freedom (not typically a Fed virtue) to attack the Fed's recent program, under boss Bernanke, of buying Treasury bonds in an attempt to drive and keep interest rates even lower than they currently are.
That may have worked, Plosser admits, in the 2008 market crisis: "But markets are no longer disrupted," it's "not clear to me that a modest reduction in long term interest rates"will cut unemployment (as it' s intended to do,) and "it is a serious mistake" for the Fed to try to use monetary policy to "substitute" for Congress's failure to adopt a stricter or more effective fiscal policy.
As the economy recovers, Plosser worries that growing Fed and bank reserves will encourage banks to lend too much, and "inflationary pressure will grow," forcing the Fed to boost rates again, which, Plosser notes, is harder and more painful than cutting rates.
"We are a year and a half into a recovery, although a modest one... Policy may soon backfire on us if we don't begin to gradually reverse course," shrink the Fed's reserves, and let interest rates rise a little if the market, and Congress's deficit, demands it.
Plosser's arguments depend on his assumption that the economy is indeed recovering. He admitted national production in 2010 grew "slightly below" his 3%+ forecast, but predicted it will pick up a bit this year, thanks to increased factory spending and more-confident consumers, and despite "weak" housing and commercial real estate.
But even that won't save millions of long-term unemployed: "Many workers may be forced to find jobs in new and unfamiliari industries... Workers may need updated skills to find their next job... Monetary policy cannot do much to help... even if we wish it could."