By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve’s aggressive efforts to
tackle the high unemployment rate is increasing the risks to the U.S.
economy as opposed to mitigating them, Philadelphia Federal Reserve
President Charles Plosser said Tuesday.

Given that the Fed has gone all-in with an open-ended asset
purchase program, the central bank must now proceed “with great care,”
Plosser told reporters after a speech to the CFA Society and the Bond
Club of Philadelphia.

The Fed’s actions over the years to support the recovery have
become increasingly accommodative, he noted.

However, “I believe at the same time that in our efforts to become
increasingly accommodative we are obtaining more risks on the other side
at some point,” Plosser added.

He said while those risks may or may not emerge, it is important
that the Fed understands them and that going forward it takes steps to
mitigate those risks — if at all possible.

“But right now we are not mitigating any risks, we are just
increasing them by expanding our balance sheet,” Plosser said.

“It’s not entirely clear to me that everything is going to work out
just as nicely as we would like,” he added.

The Fed’s maturity extension program, also known as ‘Operation
Twist’, is set to expire in December, at which point the Fed officials
say the decision will be made if economic conditions warrant further
purchases of government debt.

“I think we have to be cautious in understanding the risks we are
taking and then weigh that against what we think the benefits of what
further action are,” Plosser said.

With regards to employment, he said evidence suggests that the
impact of QE3 is likely to be “small at best,” but with a lot of risks.

The Fed’s recent actions, he said, are unlikely to encourage more
investing and hiring by businesses, arguing that firms are “sitting on
their hands” because of the uncertainty around the looming fiscal cliff
in the United States and the still-unresolved Eurozone crisis.

“Monetary policy can’t get those people to get off their hands
right now,” he argued.

Responding to a question from MNI, Plosser said monetary
policymakers must first answer the question of whether the high
unemployment rate is the result of cyclical or structural factors, and
then craft an appropriate policy response.

Plosser argued against the Fed targeting a specific level of
unemployment, arguing that there are many factors influencing the labor
market that are outside the Fed’s control.

“It’s very difficult to stand and say there is a particular
unemployment rate that we are seeking to achieve because we may get that
number wrong,” he warned.

The Fed’s policymaking Federal Open Market Committee following its
meeting on September 13 said it expects economic conditions will require
rates to remain at historically low levels until mid-2015.

However, Plosser said he believes the Fed will have to tighten
monetary policy “earlier rather than later,” although the timing will be
contingent on economic conditions.

** MNI **

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