Plosser: QE3 Risks Fed’s Credibility, Has “Meager Benefits”

While Ben Bernanke may be used to hearing criticism of the Federal Reserve’s policies from a wide array of individuals, he likely was not pleased with comments made today by a member of the central bank itself.

In a speech on Tuesday, Philadelphia Fed President Charles Plosser argued that the Fed’s recently-announced third round of quantitative easing (QE3) is unlikely to benefit the U.S. economy, threatens the central bank’s credibility, will make the Fed’s eventual exit strategy much more difficult, and could lead to substantially higher inflation in the long-run.

“We are unlikely to see much benefit to growth or to employment from further asset purchases,” Plosser stated. “Conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.”

Plosser went on to say that “I opposed the Committee’s actions in September because I believe that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment. Every monetary policy action has costs and benefits, and my assessment is that the potential costs and risks associated with these actions outweigh the potential meager benefits.”

Plosser’s speech is well worth a read in its entirety, and is available at:

http://www.philadelphiafed.org/publications/speeches/plosser/2012/09-25-12_cfa-society-of-philadelphia.cfm

The Phily Fed President later addressed a critical issue that many economists – excluding Ben Bernanke, unfortunately – believe, which is that there is little to no correlation between money printing and improvements in the unemployment rate.

Specifically, Plosser noted that “While unemployment is expected to remain above FOMC participants’ range of estimates of its longer-run level for some time, it is not at all clear that monetary policy can speed up that transition. In other words, the slow pace of the recovery should not be taken as evidence that the stance of monetary policy is inappropriate or that ever more aggressive accommodation can speed up that pace… Given our current economic situation and my reading of the empirical evidence, I do not believe that lowering interest rates by a few more basis points will spur further growth or higher employment.”

Another noteworthy item included Plosser’s contention that QE3 is likely to present significant risks when the Fed eventually has to tighten monetary policy.  “With such a large balance sheet, our transition from very accommodative policies to less accommodative policies will involve using tools we have not used before, such as the interest rate on reserves, term deposits, and asset sales… Some are interpreting the FOMC’s statement that we will keep accommodation in place for a considerable time after the recovery strengthens as an indication that the Fed is focused on trying to lower the unemployment rate and is willing to tolerate higher inflation to do so. This is another risk to the hard-won credibility the institution has built up over many years, which, if lost, will undermine economic stability.”