– Unlikely To See Much Benefit To Growth, Jobs From QE3
– QE3,Extended Guidance Costs,Risks Outweigh Potential ‘Meager’ Benefits

By Brai Odion-Esene

PHILADELPHIA (MNI) – The Federal Reserve’s most recent actions by
to spur faster economic and employment growth carry “significant” risks
that outweigh what would likely be meager benefits, Philadelphia Federal
Reserve Bank President Charles Plosser said Tuesday.

In an impassioned attack on the Fed’s decision to expand its
large-scale asset purchases as well as extend its forward guidance,
Plosser warned of the long-term inflation risks and said it is not
likely to be effective in the current environment.

“The Fed’s most recent actions carry with them significant risks,”
Plosser said in remarks prepared for delivery to the CFA Society and the
Bond Club of Philadelphia. “In my view, the potential costs outweigh
what appear to be meager potential benefits of further asset purchases
and extended forward guidance.”

The Fed’s policymaking Federal Open Market Committee voted Sept. 13
to buy $40 billion a month in mortgage-backed securities and extended
its forward guidance to indicate interest rates will need to remain at
exceptionally low levels to mid-2015.

“I opposed the Committee’s actions in September because I believe
that increasing monetary policy accommodation is neither appropriate nor
likely to be effective in the current environment,” Plosser said.

“In other words, the slow pace of the recovery should not be taken
as evidence that the stance of monetary policy is inappropriate or that
ever more aggressive accommodation can speed up that pace,” he added.

He argued that the larger the Fed’s portfolio becomes, the higher
the risk and the potential costs when it comes time to exit. Plosser
will not be a voter on the FOMC until 2014.

“Based on my economic outlook, that time may come well before
mid-2015,” he predicted. “In my view, to keep the funds rate at zero
that long would risk destabilizing inflation expectations and lead to an
unwanted increase in inflation.”

Plosser forecast economic growth of about 2% in 2012 — with the
drought in the Midwest of the United States probably cutting about half
a percentage point off growth in the second half of the year. He then
expects the pace to pick up somewhat to about 3% in 2013 and 2014.

Prospects for labor markets will continue to improve “only
gradually,” and he said he sees a 8% unemployment rate by Q4 2012.

While the Fed officials who support QE3 have argued that monetary
policy can influence what they believe to be cyclical reasons for the
high jobless rate, Plosser said structural factors are at work.

“The frictions and structural adjustments that are holding back
improvements in labor markets cannot be cured by monetary policy, nor
can monetary policy do much to speed up the slow progress we are making
on the labor front,” he said.

“In my view, we are unlikely to see much benefit to growth or to
employment from further asset purchases,” Plosser added. “If I am right,
then conveying the idea that such action will have a substantive impact
on labor markets and the speed of the recovery risks the Fed’s
credibility.”

And while the FOMC vowed to maintain its aggressive measures even
after the economy begins to see sustained improvement, Plosser countered
that his assessment is appropriate policy is likely to be tighter going
forward than anticipated by the FOMC at this point.

“Thus, I do see some risks to inflation in the longer run given the
current stance of monetary policy,” he said.

Plosser predicted the new asset-purchase program will exacerbate
the challenges the Fed will face when it comes time to withdraw the
massive amounts of monetary stimulus it has injected into the economy,
risking higher inflation and harm to the Fed’s reputation and
credibility.

“Given our current economic situation and my reading of the
empirical evidence, I do not believe that lowering interest rates by a
few more basis points will spur further growth or higher employment,”
Plosser said.

In fact, he argued that driving down interest rates even further
may encourage consumers to save even more to make up for lower returns.

Plosser also said the uncertainty about fiscal decisions — here
and abroad — are the greatest hindrance to hiring and investment, and
there is little the Fed can do little to alleviate them.

“These uncertainties constitute significant hurdles for the economy
and are retarding near-term growth,” he said.

Plosser noted encouraging signs the housing sector is beginning to
improve but cautioned that the market is not likely to see a strong
recovery until the surplus inventory of foreclosed and distressed
properties declines.

** MNI Washington Bureau: 202-371-2121 **

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