A hawk pushes against majority at Fed on trimming stimulus

BIRMINGHAM, Ala./NEW YORK Wed Feb 5, 2014 5:37pm EST

Philadelphia Federal Reserve President Charles Plosser speaks at an Economics21 event in New York, March 25, 2011. REUTERS/Brendan McDermid

Philadelphia Federal Reserve President Charles Plosser speaks at an Economics21 event in New York, March 25, 2011.

Credit: Reuters/Brendan McDermid

BIRMINGHAM, Ala./NEW YORK (Reuters) - Going a step further than his colleagues at the Federal Reserve, a hawkish policymaker said on Wednesday the U.S. central bank should wind down its bond purchases faster than planned and end it before mid-year.

Philadelphia Fed President Charles Plosser's criticism of the policy stimulus is unlikely to sway new Chair Janet Yellen and the majority of Fed policymakers, whose position was reinforced on Wednesday by Dennis Lockhart of the Atlanta Fed.

While Lockhart, a centrist, said in Birmingham he was comfortable with the current pace of trimming accommodation, Plosser's speech suggests he could dissent if the Fed continues trimming the purchases by only $10-billion monthly increments at future meetings, as most economists expect.

The central bank is now buying $65 billion per-month in Treasuries and mortgage bonds to depress borrowing costs in the U.S. economy, which was slow to recover from the 2007-2009 recession but strengthened toward the end of last year.

It trimmed the so-called quantitative easing program by $10 billion in each of the last two months and is expected to continue doing so until it stops the stimulus altogether around the autumn.

But Plosser, who backed last week's cut to the program, warned of looming communications problems if the central bank keeps buying assets while, as he expects, the U.S. unemployment rate falls below 6.5 percent some time in the first half of 2014, from the current 6.7 percent.

A voter on U.S. monetary policy this year, he argued that labor market conditions are "improving rapidly" and inflation, while low at just over 1 percent, "has stabilized" and is expected to strengthen.

"The longer we continue purchases in such an environment, the more likely we will fall behind the curve in reducing the extraordinary degree of monetary policy accommodation," Plosser told an economic seminar in Rochester, New York.

"With the economy awash in reserves, the costs of such a misfire could be considerably higher than usual, fomenting higher inflation and perhaps financial instability."


Beyond the asset purchases, the Fed has promised to keep interest rates near zero until well past the time unemployment falls below a 6.5-percent threshold, especially if inflation remains low.

Though the Fed has stressed that the two easy-money policies - bond-buying and low rates - are separate, Plosser said "communications problems" loom if the economy continues to gather strength, as he expects.

"My preference is to scale back our purchase program at a faster pace to reflect the strengthening economy," he said.

"I would like to see purchases concluded before the unemployment rate reaches the threshold, which is likely during the first half of the year."

While fellow hawk Richard Fisher, head of the Dallas Fed, has backed $20-billion cuts to the purchases, polls of economists show near unanimous expectation that the central bank will stick to $10-billion reductions at each meeting until the purchases end by the autumn.

Lockhart doubled down on that message on Wednesday.

"Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year," he told the Rotary Club of Birmingham.

Lockhart called the $10-billion step-downs in asset purchases the "default mode," although policymakers could adjust the pace if necessary.

The Fed wants to be sure the labor market, still plagued by low participation, will not stumble again on the path to recovery from the 2007-2009 recession. The jobless rate for January is due from the government on Friday.

The Fed's next policy-setting meeting is March 18-19, the second of eight scheduled for this year. But Yellen, who was sworn in as chair on Monday, could clarify her position at congressional testimony on February 11 and 13 next week.

(Reporting by Krista Hughes and Jonathan Spicer; Editing by Andrea Ricci)

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Comments (10)
AZWarrior wrote:
QE … The bailout of a rogue Federal Government. Nothing more. Like Herion, it’s habit forming and not healthy.

Feb 05, 2014 4:11pm EST  --  Report as abuse
“Labor market conditions improved and stabilized?”…”The economy continues to gather strength?” What ivory tower devoid of reality is this man thinking?

This is a classic case of a well meaning old man whose lack of education about today’s world and lack of real world experiences in business and banking has him falling back on the theories and policies of Hayek and Keynes for the UK eighty years ago instead of the theories and policies of Stigler and Lindauer for the US today.

Eighty years Keynes wrote about quantitative easing wherein money flowed into the commercial banks to be loaned out and the “bank rate” set in the UK was the wholesale price of money at which the banks could get funds from the central bank for medium and long term loans.

The initial US followers of Keynes and their students, perhaps due to their unworldliness, somehow think that quantitative easing today in the US that flows new dollars into foreign banks to be held as reserves is providing loanable funds to US commercial banks as it did in the UK eighty years ago.

Similarly, he and the other governors are confusing the UK’s very significant bank rate with the Fed’s target for 24 hour loans between banks. It’s not in anyway the same – no banker ever has or ever will ever loan out borrowed money for months and years for cars, homes, equipment, factories etc etc that has to be repaid in twenty four hours.

One has to be either terminally naive or an elderly Federal Reserve governor to believe that the ideas and policies that would have been effective in the UK eighty years ago are applicable in the US today and have been actually implemented. In fact, because the QE went abroad and into the financing of securities markets and NOT into the US commercial banks, American businesses and people have been facing a lack of money and credit throughout the entire last five years.

It isn’t that quantitative easing has been tried and failed in the United States – it hasn’t even started. Our only hope is that these people and their students will die out so that the use of the Hayek and Keynes policies can be replace by those of Stigler and Lindauer before we are all ruined.

Feb 05, 2014 5:36pm EST  --  Report as abuse
cheeze wrote:
That’s rich, just try it and watch the public welfare rolls explode. Until businesses stop hiding money over seas to bypass taxes and people are put back to work to pay taxes the government is up to their necks in this. This guy is not living in reality. Bring work back to the US and things will turn around. Real paying jobs that people can live on.

Feb 05, 2014 6:08pm EST  --  Report as abuse
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