Plosser raps Fed's QE2 program, while others defend it

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, is in more demand as a speaker now that he’s about to become this month a voting member of the central bank’s monetary policy panel.

But his speeches rarely stray from his main theme, which tends to be his worry about inflation, inflation and inflation.

That was true again Tuesday morning when he spoke before the Philadelphia chapter of the Risk Management Association at the Philly Fed.

It was the sixth speech by a member of the Federal Open Market Committee since last Friday. Federal Reserve chairman Ben S. Bernanke, vice chair Janet L. Yellen, and members Elizabeth A. Duke, Charles Evans and Narayana Kocherlakota all strongly supported the FOMC’s efforts to jump-start the U.S. economy through a $600 billion plan to buy Treasury securities and other assets.

On Tuesday, Plosser was direct in his criticism of the latest round of large-scale asset purchases by the Fed. “It is no secret that I have expressed doubts about whether the benefits of this policy, commonly referred to as QE2, exceed the costs,” he said.

He did so even while acknowledging that the Fed’s previous effort at “quantitative easing” - involving the purchase of $1.7 trillion in assets as of March - actually worked, lowering some interest rates helping to boost the economy. The difference between then and now? “Markets are no longer disrupted. Thus, it seems unlikely that we can expect the effects to operate through the same channels as the first time,” he said.

Supporters of the Fed’s actions say the central bank had to do something last fall because there was no political will for another economic stimulus plan, especially during a heated election season.

Here is where Plosser differs from many of his colleagues. “To suggest that monetary policymakers must act simply because fiscal policymakers were unable or unwilling to act is not the proper way to conduct policy,” he said.

He used the following analogy: “Doctors must diagnose the disease correctly in order to prescribe the right medicine. If the wrong drug is administered, the physician might not only fail to cure the patient, but might also make matters worse.”

So is the Fed doing harm to its patient? Far too soon to say, in Plosser’s view. Just as it’s far too soon to pronounce QE2 a success or a failure.

Fed actions take six to nine months to work their way through economy. With many recent statistics suggesting the U.S. economy is strengthening, QE2 is either the fastest-acting Fed program of all time or other factors are at work.

Ever the inflation hawk, Plosser is expected by many Fed watchers to be a dissenter on a 12-member panel that has pursued extremely accommodative monetary policies during the recession and beyond. Only when it comes time to cast his first votes later this month will we learn if Plosser is following in the footsteps of the most recent Dr. No - Thomas Hoenig, president of the Kansas City Fed, whose term as an FOMC voting member will end with the January meeting.

Judging by his latest speech, we should expect Plosser to continue to speak his mind. “Unanimity is not the natural state of affairs in life. Nor is it within the halls of the Federal Reserve,” he said.

Like those doctors Plosser referred to, economists disagree on treatments for a U.S. economy suffering from a low job count and lack of energy. In Plosser’s view, “healthy debate is necessary for informed decisions and results in better policy decisions.”

With inflation expected to remain below the Fed’s informal 2 percent target during 2011, Plosser’s message may not resonate during his one-year term on the FOMC. But count on him to voice it nonetheless.

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