December 2, 2011 / 3:07 PM / 8 years ago

Fed's Plosser says central banks can't solve fiscal woes

PHILADELPHIA (Reuters) - The U.S. Federal Reserve and other central banks should not succumb to calls for additional help from monetary authorities in the face of high budget deficits, Philadelphia Fed President Charles Plosser said on Friday.

Plosser, an inflation hawk, said the goal of maintaining stable and low inflation should not be compromised even when market volatility appears to call for intervention.

“Despite the well-known benefits of maintaining price stability, there are increasing calls to abandon this commitment in both Europe and the U.S.,” Plosser said in remarks prepared for deliver to a conference sponsored by the regional Fed bank, just two days after a coordinated central bank action to provide dollar liquidity to global banks.

Part of the blame for these pressures goes to governments, Plosser said, which have failed to come to agreement on how to bring revenues and spending into balance. But central banks, including the Fed, also bear some responsibility for crossing the line into fiscal policy with actions during the financial crisis and recession of 2007-2009, he added.

“Central banks are under increasing pressure to act, both because fiscal authorities have been unable to make credible commitments to maintain fiscal discipline and because central banks have been willing to engage in actions that stray into the realm of fiscal policy — for example, purchasing assets of the housing sector,” he said.

The Fed recently dipped its toes back into U.S. housing market, announcing in September that it would reinvest proceeds of maturing mortgage and agency bonds into mortgage-backed securities. Top officials have also discussed the possibility of another round of monetary easing that would entail large-scale purchases of housing debt.

Plosser argued that any attempt to “resort to the printing press” to avoid budget trouble was doomed to failure.

“We all understand that this option is a recipe for creating substantial inflation. Indeed, it is often the path toward hyperinflation,” he said.

Plosser said high budget deficits had inflationary potential even if the central bank resists the temptation to try to solve the problem through looser monetary policy.

“Expectations of future inflation could become unanchored and inflation could rise through no fault or consequence of central bank action or intent,” he said.

Reporting by Pedro Nicolaci da Costa; Editing by Chizu Nomiyama

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