Plosser slams Fed's 2014 low-rate forecast
GLADWYNE, Pennsylvania |
GLADWYNE, Pennsylvania (Reuters) - A top Federal Reserve official sharply criticized the U.S. central bank's decision last week to telegraph ultra low interest rates for nearly three more years, saying on Wednesday the move undermined confidence and caused confusion.
The Fed's policy-setting committee, citing a bleak outlook for the fragile economic recovery, said last week it expected to keep rates "exceptionally low" at least through late 2014. The forecast, which was contingent on economic conditions, pushed the target date some 18 months later than a previous forecast, and it sparked a rally in stocks and bonds.
"Such statements are, in my mind, particularly problematic from a communications perspective," Philadelphia Federal Reserve President Charles Plosser told a business audience. "Monetary policy should be contingent on the economic environment and not on the calendar."
Plosser is in a hawkish minority of the Fed's 17 policymakers, at odds at times with Chairman Ben Bernanke's core group of moderate doves that has pushed extraordinarily easy monetary policy the last few years and backed the late-2014 statement last Wednesday.
Yet the statement was published alongside charts showing a broad range of views among individual policymakers on when they expected rates to finally rise - forecasts ranging from 2012 to 2016 - leading to a rebound in Treasury yields that afternoon.
Plosser said the 2014 reference in the statement threatened confidence just as the economy showed signs of improvement and that it was misinterpreted in the media and elsewhere as a commitment, which it was not. "If the economy changes, then that 2014 date will go out the window," he later told reporters.
As a further complication, there are different views within the Fed as to what is considered an "exceptionally low" rate, Plosser said, adding that a federal funds rate of up to 1 percent would fall under that definition.
"There are different views, so I don't think this is the best way to communicate," Plosser said. "Continuing to signal that we want to try to ease (policy) more raises questions about our confidence in the ability of the economy to continue to grow."
The comments come a week after a Fed meeting in Washington in which Bernanke left the door open to more stimulus in the form of asset purchases if unemployment remains high and inflation remains subdued.
The Fed in late 2008 lowered rates to near zero and has kept them there to try to pull the U.S. economy out of a brutal recession. It has also bought some $2.3 trillion in long-term securities to drive interest rates lower, an unprecedented step whose efficacy is fiercely debated both inside and outside of the central bank.
Plosser sits on the Fed's communications committee but does not have a vote this year on its policy-setting Federal Open Market Committee (FOMC). He repeated on Wednesday that there is currently "little justification" to further ease monetary policy.
"Given the very accommodative monetary policy that has been in place for more than three years, I believe we must continue to monitor inflation measures very carefully," he said at a breakfast meeting of the Main Line Chamber of Commerce.
Yet core inflation is running at about 1.7 percent and is below the Fed's newly set target of 2 percent. Inflation has slowed the last couple of months and Fed policymakers, including Plosser, expect it to ease this year, which could pave the way for more asset purchases.
The Fed declined last week to set a target for its other mandated concern, unemployment, citing the weak direct link between monetary policy and the labor market. U.S. unemployment has eased but remains historically high at 8.5 percent.
On Wednesday, a report showed the pace of job creation by private employers slowed in January after a sharp gain the month before. The sector added 170,000 jobs last month, shy of economists' expectations for 185,000 jobs.
The Labor Department issues a fuller January employment report on Friday, and private payrolls are expected to rise by 150,000.
Plosser, who dissented twice from FOMC decisions last year, said he backed the new inflation target as well as the publishing of rate projections of individual policymakers.
Earlier this week, Plosser confirmed that he projected a rate rise this year.
(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and Padraic Cassidy)
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