By Steven K. Beckner

NEW YORK (MNI) – New York Federal Reserve Bank President William
Dudley Friday said the climate of very low interest rates likely
increases the size of fiscal “multipliers” and thus requires care in the
size of fiscal stimulus the federal government provides.

Dudley also said that, despite losses to those who receive interest
payments, the Fed’s policy of lowering rates is a net plus for the
economy.

Philadelphia Fed President Charles Plosser, appearing with Dudley
on a panel at a University of Chicago Booth School of Business monetary
policy forum, stressed the need for a “credible” plan of deficit
reduction.

Simply saying that future Congresses will reduce deficit spending
is not credible, said Plosser.

Plosser said he does not think the fiscal multiplier — the degree
to which a given amount of deficit spending will increase GDP — is very
high. Dudley differed, particularly in a climate of very low rates.

“In the current environment where we’re at the zero bound and
interest rates are very low, it’s probably fair to say that the fiscal
multipliers are higher,” said Dudley, but he added that therefore the
government has to be “somewhat cautious about how much fiscal (stimulus)
is put into the economy.”

In earlier prepared remarks, Plosser said the Fed had veered into
fiscal policy by purchasing mortgage-backed securities and other
programs, and he argued for a “new accord” between the Fed and Treasury
to draw “a bright line” between monetary and fiscal policy.

But Dudley disputed Plosser’s concerns.

“I would argue that to date the Federal Reserve has not engaged in
anything that constitutes fiscal action,” he said. “Our interventions
brought financial stability, which is very much the province of the
central bank.”

Dudley also observed that the Fed has “not lost a penny” on its
various credit facilities designed to help financial institutions that
suffered insolvency during the financial crisis.

“Despite a very bad macroeconomic environment our actions did not
step over line into the fiscal arena,” he said, adding that “certainly
from a financial stability perspective … it is very much in the
province of the central bank.”

The Fed “can’t fulfill its mandate of maximum employment and price
stability” without price stability, Dudley said.

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