Fed's Plosser: Opposed to risky QE3 because it won't work

Tue Sep 25, 2012 1:53pm EDT
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By Pedro Nicolaci da Costa

PHILADELPHIA (Reuters) - The Federal Reserve's latest monetary stimulus will not do much to boost economic growth or lower unemployment and raises the risk of longer-run inflation, Philadelphia Fed President Charles Plosser said on Tuesday.

Plosser, an inflation hawk, said he opposed the U.S. central bank's decision to embark on an open-ended program of asset purchases, starting with $40 billion per month in mortgage-backed securities.

"I believe that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment," Plosser told the CFA Society of Philadelphia and the Bond Club of Philadelphia at an event hosted by the Philly Fed.

Plosser said he believes many of the impediments to bringing down the nation's 8.1 percent jobless rate are structural in nature and therefore not amenable to monetary policy solutions.

Against that backdrop, the Fed may well need to begin raising interest rates before its current guidance of mid-2015, said Plosser, who is not a voting member on the policy-setting Federal Open Market Committee this year.

Plosser said he does not see a large risk of a U.S. inflation outbreak but does see the Fed's highly stimulative policies as raising the threat of undesirably high consumer price increases in the future.

"By greatly expanding the size of the Fed's balance sheet, the new asset-purchase program will exacerbate the challenges that the Fed will face when it comes time to exit," Plosser said.

He expects the U.S. economy, which grew at a 1.7 percent annual rate in the second quarter, to expand by 2 percent this year and around 3 percent per year in 2013 and 2014.   Continued...