The Federal Reserve is running a very real risk of spurring unwelcome levels of inflation over the long run based on the current path of monetary policy, a veteran U.S. central bank official said Thursday.
In a speech in Avondale, Pa., Federal Reserve Bank of Philadelphia President Charles Plosser pressed forward again with what's been a persistent course of criticism aimed at the Fed's recent choices on monetary policy. The central banker believes the balance sheet expanding bond buying and conditional pledge to keep rates very low through the middle of 2015 announced last month is putting the Fed in the position where it may not be able to achieve one of its key mandates, price stability.
"The Fed's most recent actions carry significant risks," Mr. Plosser said, explaining "I opposed the Committee's actions in September because I believe that increasing monetary policy accommodation is neither appropriate nor likely to be very effective in the current environment." He added that in the Fed's latest gambit, "potential costs and risks associated with these actions outweigh the potential benefits."
For Mr. Plosser, the problems the Fed faces are longer run. He expects that over the medium to long term, inflation will stay "near" the Fed's 2% official target. But to achieve this, Plosser said "the appropriate monetary policy is likely to become tighter more quickly than the Committee anticipated in its latest statement." Given Mr. Plosser's disagreement with the current official outlook for policy, he said "I do see some risks to inflation in the longer run."
Mr. Plosser's comments came from the text of a speech that was prepared for delivery before the Southern Chester County Chamber of Commerce. The official is not currently a voting member of the monetary policy setting Federal Open Market Committee.
Echoing recent remarks, Mr. Plosser said he doubts the Fed's bond buying will do that much for an economy held by back by uncertainty about the outlook and the continuing effort to recover from the effects of the financial crisis.
"We are unlikely to see much benefit to growth or to employment from further asset purchases," Mr. Plosser said. "Business leaders who have talked to me continue to cite uncertainty about fiscal decisions--here and abroad--as the greatest hindrance to hiring and investment," and modestly lower borrowing won't change the situation much.
What's worse, providing false hope can hurt the Fed's mission, Mr. Plosser said. "Conveying the idea that such an action will help speed up the recovery risks the Fed's credibility" and complicates effective monetary policy making at some point in the future.
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