— FOMC Aug. 9 Decision Was ‘Inappropriate Policy At Inappropriate Time’
By Yali N’Diaye and Brai Odion-Esene
WASHINGTON (MNI) – The Federal Reserve’s monetary policy decision
in August was “inappropriate” both in its design and its timing,
Philadelphia Fed President Charles Plosser said Wednesday, adding it is
likely that policy rates be raised well before mid-2013.
“Personally I believe we’re going to have to raise” policy rates
“well before 2013,” Plosser told Bloomberg Radio, adding, “A lot can
change in two years.”
Whenever that date is, he continued, “it’s unlikely to be two years
from now” and it will depend on the data.
Explaining why he dissented at the August 9 Federal Open Market
Committee meeting, Plosser said, “It was an inappropriate policy at an
inappropriate time.”
He said the Fed should have waited for more clarity on economic
data, urging more “patience,” while stressing monetary policy cannot be
expected to be a panacea for all the economic problems.
And certainly, “the stock market is not our dual mandate,” Plosser
said, adding monetary policy cannot cure all shocks.
The FOMC stated on August 9 that “The Committee currently
anticipates that economic conditions–including low rates of resource
utilization and a subdued outlook for inflation over the medium run–are
likely to warrant exceptionally low levels for the federal funds rate at
least through mid-2013.”
Plosser dissented along with Dallas Fed President Richard Fisher
Richard and Minneapolis Fed President Narayana Kocherlakota, “who would
have preferred to continue to describe economic conditions as likely to
warrant exceptionally low levels for the federal funds rate for an
extended period.”
Plosser opposed various aspects of the August policy decision,
arguing that it was unclear whether data warranted such action, and
called the FOMC’s description of economic conditions overly pessimistic
and that the timing was poor.
Plosser argued it was unclear whether economic conditions at the
time warranted “efforts to ease.”
He noted that since the second round of quantitative easing decided
in November 2010, inflation has risen while the unemployment has
declined.
He also stressed that despite the weak data, “the last part of July
actually had some pretty good signals,” with better claims and jobs
reports.
“So it’s not clear that if we base our policies on things like
inflation, inflation expectations and capacity utilization,” he said,
“that the news was that we needed to take further action.”
In addition, the part “that described the state of the economy was
excessively negative,” doing nothing to bolster business or consumer
confidence at a time it is not strong.
He also pointed out that while the economy has not performed as
well as expected in the first half of the year, “very few people are
actually forecasting a recession.”
“So it seems to me the better part of wisdom was patience; wait
until September and judge the economic data that came in to see if we
got more clarity on the outlook,” he concluded. “We’re reacting too
quickly here.”
Furthermore, changing the “extended period language to a date was
poorly designed and was inappropriate,” Plosser said, stressing policy
decisions should not be based on the calendar but on economic
developments.
And timing-wise, Plosser also thought “the decision was poorly
crafted.”
He was concerned markets would interpret the timing — a “day after
a very big stock market move” — as a reaction to the stock markets,
which “would be troubling,” since stock markets are not part of the
Fed’s mandate, he said.
Overall, Plosser warned against expecting too much from monetary
policy.
“We’ve come to expect too much from the Federal Reserve and too
much from monetary policy,” he said, “running the risk of not
delivering” because the Fed simply cannot, jeopardizing the central
bank’s credibility.
“It’s a big mistake for policy makers” to believe the Fed has to
act instead of fiscal policy, Plosser warned.
** Market News International Washington Bureau: 202-371-2121 **
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