Bernanke pursues a weak dollar policy, impoverishing dollar savers. When are we going to grow up and accept we can’t print, borrow, and spend our way to prosperity?
By Michael S. Derby
A veteran Federal Reserve official argued Thursday that new central bank stimulus efforts are unlikely to spur the growth supporters want, as those same policies further complicate the Fed’s eventual exit strategy.
The economy “is not doing as well as anybody would like” and “I think the case is pretty clear we are in a funk” as households cut debt and companies hunker down in the face of pervasive uncertainty about the future, Federal Reserve Bank of Philadelphia President Charles Plosser said in an interview with Dow Jones Newswires.
Given what ails the nation, “I am really dubious” stimulus now being provided by the Fed is “really going to have very much effect on the real aspects of our economy, mostly employment and real growth,” Plosser said.
“We’ve been making that argument for four years now, that if we give it just a little bit more, just a little bit more, just a little bit more, and pretty soon those little bit mores add up to a lot,” Mr. Plosser said.
“I’m just not convinced” that lowering borrowing levels another 10 or 20 basis points “is really going to motivate people to break out of the challenges they’re facing,” he said.
Mr. Plosser said the best strategy for the Fed right now is simply to step aside.
“This is just one of those recoveries where patience is going to be the biggest thing,” he said, adding “I don’t think the fact it’s slow is an indication that the level of monetary policy accommodation is too low, or that necessarily more aggressive accommodation would speed it up.”
“It doesn’t surprise me things look kind of bad right now,” Mr. Plosser said. “I don’t think that’s going to change dramatically over the next three or four months,” he said.
When it comes to the outlook, “I don’t think that monetary policy will be particularly determinant” in what happens, Mr. Plosser said.
Plosser was interviewed in the wake of the Fed’s decision two weeks ago to add additional monetary policy stimulus to the economy. The central bank launched then an open ended program to buy mortgage bond and tied the effort’s fate to how much the job market is able to improve. It also expended until the middle of 2015 its expectation interest rates will stay near zero. Supporters of the action believe lower mortgage yields, at a time where the housing market is showing some signs of renewal, can lead to a broader improvement in financial conditions and overall economic activity.
Plosser, who doesn’t have a vote on the monetary policy setting Federal Open Market Committee this year, has been a persistent critic of the central bank’s efforts to provide stimulus, and he isn’t alone. Critics argue that the central bank has already done so much for the economy for so little gain, and that further action could create significant trouble in the future.
With benefits of providing additional monetary policy support small, Mr. Plosser argued, as he has in the past, potential costs could be very large. The central bank clearly has put in place tools to manage the draw down of a huge and expanding balance sheet, but it will be very difficult to implement those actions, he warned. Mr. Plosser said he hopes and is optimistic the Fed will do the right thing, but there are risks it may not be able too.
Mr. Plosser zeroed in on the Fed’s power to pay interest on bank reserves. That tool theoretically can keep large levels of bank reserves on the Fed’s books and out of the economy. Should conditions improve, the Fed can raise the rate to give banks the incentive not to put the money to work in the broader economy, thus blunting a potential inflation surge.
Mr. Plosser sees political problems with this. He sketched out the implications of the Fed having to raise the interest on reserves rate from 0.25% to 1.25% on $2 trillion in reserves, in a hypothetical example. Under such a scenario, “the Fed will turn over $20 billion less to the Treasury and give it to banks,” Mr. Plosser said.
“That’s not going to go over very well in some quarters, I suspect,” he said, adding “I guarantee you there will be stories we’re subsidizing the banks” by pursuing such a policy.
Mr. Plosser also noted that while the Fed doesn’t act with the value of the dollar’s international value as a target, “the chairman and some of the people on the committee have said one of the channels” of monetary policy stimulus “might be depreciating the exchange rate.” He noted this is “particularly problematic for countries that want to peg their currencies to the dollar,” but he added “that’s a choice they make” and those nations have it within their power to alter their own respective policy stance.