By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve should avoid a rush to judgment in
adopting a new communications policy and learn a lesson from the confusion
created by its adoption of a calendar date as a forward guidance for monetary
policy, Philadelphia Federal Reserve Bank President Charles Plosser said Thurday

Speaking to reporters after a speech at the Cato Institute, Plosser said
the central bank needs more humility in decision making; accusing its policies
of having wiped out household wealth, and that additional asset purchases
currently under consideration would pose more risks than benefits.

On the communications front, Plosser said the Fed’s ability to explain its
actions is really difficult, adding that the central bank has “a big
communication problem.”

The minutes of the October Federal Open Market Committee meeting published
Wednesday showed Fed officials favor using thresholds in monetary policy

Plosser told reporters, however, that using thresholds could making
communicating monetary policy more complicated than it needs to be. “Thresholds
carry very difficult communication problems,” he said

He urged patience in the deciding on a new communications policy, noting
the Fed rushed to include a calendar date in the FOMC statement — starting with
the August 2012 meeting — without fully considering the ramifications.

Including a calendar date “was a bad idea,” he said, adding it is an
opinion that other Fed officials are coming around to.

Plosser himself favors the use of systemic rules to guide monetary policy
decisions, arguing that it would mitigate the risks over the long term posed by
current Fed policy.

With regard to those policies — and in particular if the Fed should
replace the maturity extension program with more asset purchases — Plosser
believes the risks of the Fed expanding its balance sheet to support the economy
outweigh the costs.

“I look at the benefits of what we are doing and whether or not additional
actions will actually help reduce unemployment … I’m very dubious of that,” he
said. “I don’t see the benefits outweighing the costs here.”

The Fed, he said, needs “more humility and less certainty” when its comes
to crafting monetary policy.

“I think the economy is moving along at a very modest pace,” Plosser said,
but added that there remains a lot of uncertainty that needs to be resolved.

But the economy is moving forward, just not at a pace that Fed officials
are comfortable with, he added.

On the jobs front, Plosser noted that with the employment figures for July
to September being revised upwards, “maybe things are a little better than we
might have thought.”

Still, the drought over the summer had an adverse impact on third quarter
growth, he said. In addition, the effects of superstorm Sandy is going to take a
toll on growth this quarter.

When taking questions from the audience, Plosser said his main worry when
time comes to exit and reverse the Fed’s course, will be generating inflation.

“I worry what the transition is going to look like to return to a more
stable state of affairs,” he said.

He warned that “the longer term may not be so rosy” the longer Fed pursues
its aggressive stimulus measures, adding, “The risks remain quite high.”

“We need to be carful about how we evaluate the costs and benefits of out
policies,” he added.

Plosser accused the Fed of having wiped out a lot of household wealth in
its response to the 2008 financial crisis, as the zero interest rate policy
means households trying to save can’t earn anything on their investments — so
they decide save at even higher levels.

Lower interest rates won’t erase business uncertainty or help households
rebuild their balance sheets, he said.

He predicted that the United States will not see a return to substantive
growth until business have more clarity and households have deleveraged enough
to return “to a more positive spending mode.”

Looking ahead, Plosser said there are lots of structural changes taking
place in the U.S. economy, with the possibility that consumption in the future
could drop from 70% of GDP to 65%.

That, he said, would be “a very complicated adjustment” for the U.S.

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