By Denny Gulino
WASHINGTON (MNI) – Only significant deflation would budge him from
the view that more asset purchases could hurt Federal Reserve
credibility and do little to help hiring, Philadelphia Fed President
Charles Plosser — an FOMC voter next year — said Wednesday.
Appearing in the part of South Jersey with the Philadelphia
District’s highest unemployment rate, Plosser said he sees hiring
continuing to pick up the rest of this year and next year.
On top of the gradual climb out of the “deep hole” of the past
recession, the U.S. jobs picture is beset by other problems that will
take longer to fix, he said. There are geographic imbalances in job
creation, skills gaps and sectors of the economy that will continue to
shed jobs regardless of recovery.
Plosser said he does not find it surprising that the recovery is
only “modest,” given the severity of the recession. And employers will
continue to be cautious in hiring, not only because they have yet to be
convinced recovery is firmly established, but because they face so much
uncertainty about future regulations and other government policies.
Plosser repeated he does not see the likelihood of slippage into
another recession and in fact sees growth rates “to be around 3 to 3 1/2
percent over the next two years, with stronger business spending on
equipment and software, moderate growth of consumer spending and gradual
improvement in household balance sheets.”
So, after “the worst financial and economic crisis that most of us
have every experienced” there still will be a “slow but sustainable
economic recovery” continuing, both in the Philadelphia Fed District and
in the nation as a whole, he said.
But it was Plosser’s views on the Fed’s balance sheet, though not
appreciably different from what he has been saying, that stood out in
the wake of the latest FOMC meeting that many see as promising a further
expansion in quantitative easing.
“Monetary policy is not a magic elixir that can solve every
economic ill,” he said. “Doctors must diagnose the disease correctly if
they are to prescribe the correct medicine. Otherwise, they could do
the patient more harm than good.”
In fact, more Fed asset purchases could harm the Fed as well, he
said, hurting the central bank’s credibility if a new expansion of the
balance sheet had little appreciable effect on employment.
“While we were dropping the federal funds rate by 5 percentage
points to near zero, monetary policy was unable to stop the rise in the
unemployment rate from 5 to 10 percent,” he said. “This suggests that
very precise management of unemployment rates over the short- term is
simply not something for which monetary policy is particularly well
suited.”
“It is difficult, in my view, to see how additional asset purchases
by the Fed, even if they move interest rates on long-term bonds down by
10 or 20 basis points, will have much impact on the near-term outlook
for employment,” he continued. “Sending a signal that monetary
policymakers are taking actions in an attempt to directly affect the
near-term path of the unemployment rate, and then for those actions to
have no demonstrable effects, would hurt the Fed’s credibility and
possibly erode the effectiveness of our future actions to ensure price
stability.”
Beyond that, “It also risks leading the public to believe that the
Fed is seeking to monetize the deficit and make it more difficult to
return to normal policy when the time comes.”
He returned to the subject later in his speech, saying flatly, “I
would prefer not to engage in further asset purchases at this time” and
“I do not support further asset purchases of any size at this time.”
He did offer one exception, if deflation materialized, which he
said is not much of a risk. Low inflation rates in the neighborhood of
the current 1% — and he acknowledged some recent deceleration lately —
“are not a problem.” But if inflation acquired a minus sign, then
“perhaps, aggressive asset purchases couple with clear communication
that our goal is to combat deflationary expectations” would be in order,
even for him, he said.
Inflation is instead likely to remain about where it is, with some
acceleration of the core rate “toward 2 percent in 2011.”
“Most people forget, or are too young to know, that from 1953 to
1965, the average inflation rate measured by the consumer price index
(CPI) was just 1.3 percent,” he said. “For the last 15 years,
Switzerland’s average inflation rate has been less than 1 percent. In
neither of these episodes did low inflation lead to economic stagnation
or fears of deflation.”
“It is important that monetary policymakers remain vigilant to
ensure that neither disinflationary trends nor inflationary trends lead
to an unanchoring of inflation expectations, which would undermine the
return to price stability in the medium to long run,” he said.
What he expects, Plosser repeated, is for the recovery to continue
to unfold and for the Fed “to begin normalizing monetary policy from its
current very accommodative stance” at some point. “That will mean
selling assets to shrink the Fed’s balance sheet and raising the level
of short-term interest rates.”
The challenge for the Fed, he said, “is recognizing the proper
timing to ensure that the economy remains on a sustainable path toward
price stability and full employment.”
** Market News International Washington Bureau: 202-371-2121 **
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