Monetary policy cannot speed up labor market healing or prevent asset price bubbles, and counting on it to do so may do more harm than good, a top U.S. Federal Reserve official said.
In a speech to be delivered in Santiago, Chile, on Monday, Philadelphia Federal Reserve Bank President Charles Plosser cautioned against relying too much on the central bank and said its powers ought to be curbed to prevent abuse.
I believe we have come to expect too much from monetary policy, he said, according to prepared remarks, a copy of which was made available in Washington before the speech.
Monetary policy is not going to be able to speed up the adjustments in labor markets or prevent asset bubbles, and attempts to do so may create more instability, not less.
Plosser, a well-known inflation hawk, rotates into a voting slot this year on the Fed's monetary policy-setting panel, the Federal Open Market Committee. The last time he had a vote, in 2008, he dissented twice because he thought the committee was lowering interest rates too aggressively.
Plosser said he did not rule out the possibility the Fed would raise interest rates this year, amid wider expectations for rates to remain low for a prolonged period. However he expects unemployment to lag for some time, and improve only slowly.
If economic growth in the United States continues to gain traction and the prospects begin to look ever better, it might be time for us to begin thinking about how do we begin to gradually take our foot off the accelerator, Plosser told reporters.
I do know that there is a danger that we wait too long, and the consequences of that might be disruptive and dangerous, he added.
QE2 COULD WRAP UP EARLY
Plosser has also questioned the effectiveness of the Fed's current $600 billion bond-buying program, and said last week it could backfire unless the central bank gradually changes course to head off inflation.
He said the quantitative easing program could wrap up earlier than five months' time, if conditions call for it.
In Monday's speech, Plosser said monetary policy's ability to neutralize the economic consequences of shocks such as rising oil prices or a sharp downturn in the housing market was quite limited.
Asking monetary policy to do what it cannot do with aggressive attempts at stabilization can actually increase economic instability rather than reduce it, he said.
He said the central bank, through some of its emergency lending programs set up during the depths of the financial crisis in 2008, had crossed the Rubicon into fiscal policy that should be the responsibility of Congress.
Those actions left the central bank vulnerable to political interference, he said, adding that it was likely the Fed would come under pressure in the future to use its powers as a substitute for other fiscal decisions.
This is a dangerous precedent, and we should seek means to prevent such future actions, he said.
The Dodd-Frank financial regulatory reforms, passed by Congress last year, set limits on the Fed's use of so-called section 13(3) powers to make emergency loans in unusual and exigent circumstances to businesses that do not normally have the right to borrow from the central bank.
Plosser has advocated eliminating those section 13(3) powers entirely, and said more restrictions were needed beyond the limits included in the Dodd-Frank reforms.
Plosser also reiterated his call for the Fed to establish and publicly commit to an explicit inflation objective.
(Reporting by Emily Kaiser in Washington and Simon Gardner and Brad Haynes in Santiago; Editing by Maureen Bavdek)