Fed’s Plosser Says Measured QE Taper Steps May Be Too Slow
Washington (Mar 6) Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, said incremental reductions in bond purchases at each Fed meeting may be too small with U.S. growth poised to accelerate this year.
“Reducing the pace of asset purchases in measured steps is moving in the right direction, but the pace may leave us well behind the curve if the economy continues to play out according to the FOMC forecasts,” Plosser said today in London.
Fed Chair Janet Yellen said Feb. 27 that a “significant” change in economic outlook might prompt the Fed to consider a change in its tapering strategy. The policy-making Federal Open Market Committee on March 18-19 will hold its first meeting led by Yellen since she succeeded Ben S. Bernanke last month.
The central bank said on Dec. 18 it would trim its monthly bond purchases to $75 billion from $85 billion, and in January announced another $10 billion reduction. The purchases are designed to hold down long-term borrowing costs and spur economic growth.
“The FOMC is now on a path of measured reductions, which, if continued, will end the purchase program later this year,” Plosser said to the Official Monetary and Financial Institutions Forum. “If the economy continues to improve, we could find ourselves still trying to increase accommodation in an environment in which history suggests that policy should perhaps be moving in the opposite direction.”
Plosser told reporters after his speech that while he had preferred a faster end to the so-called quantitative easing program, the policy committee isn’t inclined to alter the plan in response to small changes in the economy.
“I think the bar for changing the pace is pretty high,” he said. “There seems to be fairly widespread acceptance or acknowledgment in the markets that we’re on this path and we’re not going to deviate from it unless something pretty significant happens, so I’m OK with it for now.”
Answering audience questions at the forum, Plosser said “exiting from this very large balance sheet gets harder the bigger the balance sheet gets.”
If the Fed fails to achieve “a Goldilocks soft landing,” he said, interest rates “could rise very fast” in financial markets.
“We could be in a situation where we are chasing rates up, which may prove difficult to do,” he said.
Plosser said he expects U.S. economic growth to increase to a 3 percent rate this year, pushing unemployment to 6.2 percent or lower by year-end from 6.6 percent in January. He said recent weakness in economic reports is mostly due to the harsh winter. His projections are in line with the FOMC forecasts made in December of 2.8 percent to 3.2 percent growth and 6.3 percent to 6.6 percent unemployment in the fourth quarter.
“I believe that weakness largely reflects the severe winter weather rather than a frozen recovery,” Plosser said. “So, we must be wary of attaching too much significance to the latest numbers. As a monetary policy maker, I prefer to take a longer view rather than let our decisions be whipsawed by the most recent statistics, which are often noisy and subject to revision.”
The February jobs report shouldn’t have much bearing on policy because the U.S. was “in the midst of terrible winter storms,” Plosser told reporters. “I’m going to take it with a grain of salt.”
The Fed, in its Beige Book review of regional conditions, said yesterday the economy in most districts grew last month even as harsh winter weather impeded hiring, disrupted supply chains, and kept customers away from stores and auto dealerships.
The Philadelphia Fed leader predicted inflation will move up toward the central bank’s 2 percent target over the next year, adding he sees “some upside risk to inflation in the longer term” from record stimulus.
The Fed’s pledge to keep the main interest rate at zero as long as unemployment stays above 6.5 percent “has become irrelevant” with the jobless rate on the verge of crossing the threshold, Plosser said. He said he favors a “more systematic” approach to policy that would give investors and businesses guidance on how policy will be set.