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Charles Plosser: Fed Moves May Have Long-Term Risks

The "extraordinary" moves the Fed has taken to rouse the economy from its sluggishness "carry long-term risks for our economies and for central banks," Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Thursday.

Calling the moves "well intentioned," Plosser told a Cato Institute conference, it will take time before "the effectiveness of various actions" can be determined.

"Despite these extraordinary efforts by the Fed, our economy remains lackluster - unemployment remains uncomfortably high and is declining only slowly, economic growth is mediocre, and confidence in the future remains subpar," Plosser said according to prepared text released by the Fed.

"Looking at this state of economic affairs, one might conclude that the Fed just hasn't done enough. Since the Fed seems to be missing on the employment part of its dual mandate, some suggest the Fed can and should continue to pursue more accommodation as long as inflation remains contained. But this is not the only conclusion one could draw from the evidence. Instead, one could conclude that the factors contributing to mediocre economic performance cannot be offset by monetary policy," he continued.

Historically, monetary policy had, at best, a "tenuous" impact of employment. "Of course, one might argue that even if there was only a small chance that additional accommodation could put people back to work more quickly, it would be worth undertaking," Plosser noted. "Yet, that would only be true if the potential benefits of such a policy outweigh the potential risks that such accommodation creates. I join many economists who are skeptical that further asset purchases will have much effect on longer-term interest rates. Even if they do, the declines in long rates are likely to have fairly negligible effects on employment or growth at best. On the other hand, I believe the extraordinary policies the Fed has pursued pose substantive longer-term risks: These include moral hazard, future inflation, and loss of institutional credibility."

Plosser outlined his "preferred" policy course including: being clear and explicit about policy goals and objectives, acknowledging what policy can and cannot do; making a "credible commitment" to goals by describing how policy will be conducted; communicating clearly and transparently about policy actions; and striving "to ensure central bank independence."

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