February 24, 2012 / 6:30 PM / in 7 years

Fed's Plosser-fiscal, monetary policy are blurred

NEW YORK, Feb 24 (Reuters) - The financial crisis has forced central banks including the Federal Reserve to take risky actions that go beyond the realm of the monetary authorities, a top Fed official said on Friday.

Charles Plosser, the Philadelphia Fed’s hawkish president, said monetary policymakers must avoid taking actions that wade into the fiscal arena.

“Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions,” Plosser told a conference on monetary policy sponsored by the University of Chicago Booth School of Business.

He cited steps taken by the Fed, such as purchases of mortgage assets, as an example of actions that were inappropriate for a central bank to take.

“Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline,” Plosser said. “This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving its mandate.”

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