With its moves to end the fiscal crisis, the Federal Reserve "embarked on a path that has blurred the distinction between monetary policy and fiscal policy," Charles Plosser, president and chief executive officer of the Federal Reserve Bank of Philadelphia, said Friday.
"Unfortunately, from my perspective, the Fed and other central banks have already" gone down that road, Plosser told the Philadelphia Fed Policy Forum, according to prepared text of his remarks released by the Fed.
"These steps were undertaken with the sincere belief that they were absolutely necessary to address the challenges posed by the financial crisis," he said.
Even Operation Twist should have been carried out by the Treasury Department, Plosser argued.
Attempts to do away with maintaining price stability result are a result of fiscal authorities being "unable to make credible commitments to maintain fiscal discipline and because central banks have been willing to engage in actions that stray into the realm of fiscal policy," he said.
Calling it "a disturbing trend," Plosser warned that crossing that line "risks undermining the independence of the central bank to control monetary policy and its ability to preserve a credible commitment to price stability."
When a specific market is targeted and securities purchased, it alters "the allocation of credit across markets, reducing funding costs for some sectors and likely raising costs for others," he said.
"These programs departed from the usual way the Fed implements monetary policy through buying and selling U.S. Treasury securities, an activity that is generally neutral across markets," Plosser said.
"When the Fed engages in targeted credit programs that seek to change the allocation of credit across markets, I believe it is engaging in fiscal policy."
