–Warns Expectations What CBs Can Achieve Need To Be Scaled Back
–Central Banks Must Be More Realistic Or Risk Unleashing Inflation
–Interview Conducted By Central Banking May 11, Approved June 29

LONDON (MNI) – Expectations in the financial markets and among the
public that central banks are ‘omnipotent’ are dangerous and need to be
scaled back, warns Philadeplphia Federal Reserve President Charles
Plosser.

In an interview with Central Banking Publications, Plosser says:

“This notion that central banks are omnipotent is really a problem,
and we need to ratchet expectations back to reality,” Plosser said.

“Everybody seems to think that if the Fed just prints more money
and keeps interest rates low, then everything will be fine. That’s
wrong,” he said.

“The public has come to believe that central banks can solve almost
any economic problem. This is unfortunate. It has led to expectations
that central banks can accomplish things that they cannot do – things
that they will fail trying to do.”

Plosser says that the risk is that this could undermine the
credibility of central banks and so threaten their ability to achieve
their primary goal – price stability.

“To deliver on that goal, central banks must have credibility,
without which inflationary expectations can become unanchored and
inflation unleashed,” he said. “We have to be somewhat more realistic,
and say there are some things that central banks cannot do. If we don’t,
then we could get the country in trouble.”

Plosser said that central bankers have to renew their interest in
the monetary transmission mechanism to better understand links between
monetary policy, asset prices and inflation.

“In order to probe further into this question about imbalances and
asset-price movements, we need to go back and think harder about the
monetary transmission mechanism. We need to ask ourselves how monetary
actions show up over time in financial asset prices,” Plosser was quoted
as saying.

“We need to consider the channels of monetary policy more broadly.
Doing so might lead us to look at financial markets and their behaviour
as signals about monetary policy in a different way,” he said/

“If exchange rates, or house prices, or capital flows appear to be
behaving in unusual ways, then what is that telling me? Do I need to be
changing the stance of monetary policy because monetary policy is looser
or tighter than I thought it was ? It might be telling me something
about the future of inflation,” he continued.

–London Bureau; Tel: +44207862 7492; email: ukeditorial@marketnews.com

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