The world's central banks should not have unfettered ability to purchase assets because that violates the traditional separation of monetary and fiscal policymaking and can allow governments to inflate away debts, a top Federal Reserve official said on Monday.
Instead, the Fed and other central banks should have clear limits on how much - and in what way - they can expand balance sheets, so as to avoid problems associated with the unprecedented policies adopted in the wake of the global financial crisis and recession, Philadelphia Fed President Charles Plosser said in prepared remarks.
The central bank has nearly $3 trillion in mostly long-term Treasuries and other securities on its balance sheet after two rounds of so-called quantitative easing since 2009. The European Central Bank's balance sheet has swelled even larger, to more than 3 trillion euros ($3.98 trillion), as it also took steps to revive the euro zone economy.
Granting vast amounts of discretion to our central banks in the expectation that they can cure our economic ills or substitute for our lack of fiscal discipline is a dangerous road to follow, Plosser was set to tell a conference at the French central bank.
Clear boundaries and resisting the use of the balance sheet as a new policy tool would also improve fiscal discipline by making it more difficult for the fiscal authorities to resort to the printing press as a solution to unsustainable budget policies, he said.
Plosser, an outspoken policy hawk who opposed the Fed's last round of bond-buying, has said repeatedly that the central bank should do no more to stimulate the U.S. economy, which has shown signs of strength in the last few months. Still, Chairman Ben Bernanke and other Fed policymakers have left the door open to another round of large-scale asset purchases if needed.
The Bank of England and others have recently ramped up such purchases, which are meant to drive longer-term interest rates lower, spurring investment and spending. Critics, however, worry that central banks will have difficulty offloading the securities when the time comes to tighten policy.
Plosser, who does not have a vote this year on the Fed's policy-setting committee, also criticized the Fed's purchases of mortgage-backed securities as blurring the lines between the U.S. government's fiscal policy and the Fed's monetary policy.
The committee's statement in January that it wanted to return to an environment in which interest rates are the primary tool was a good first step to returning to more normal policymaking, Plosser said.
I interpret this as saying that our balance sheet should not be viewed as a new independent instrument of monetary policy in normal times, he said.
($1 = 0.7540 Euro)
(Reporting by Leigh Thomas, Writing by Jonathan Spicer; Editing by Gary Crosse)