The Federal Open Market Committee "missed an excellent opportunity" when it failed to taper its asset purchases at its most recent meeting, and this lack of action "undermines the credibility of its own forward guidance," Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Tuesday.
"To delay tapering of our current asset purchase scheme without clear and significant departures from prior guidelines suggested the FOMC was changing the goalposts and deviating from June's forward guidance," he told the Greater Johnstown Cambria County Chamber of Commerce in Pennsylvania, according to prepared text of his speech, released by the Fed. "This undermines the credibility of the Committee and reduces the effectiveness of forward guidance as a policy tool."
Additionally, the failure to cut the purchases raises monetary policy "uncertainty," since it may be seen "as a sign that the FOMC had become much less confident that growth would be sustained in the manner the Committee envisioned in June," Plosser said. "Thus, we undermined our own credibility as well as the public's confidence in the economy. These were not the messages that I wanted to send. Thus, I disagreed with the decision not to go forward with a modest reduction in the pace of our asset purchases."
Data between the June and September FOMC meetings, he said, "were largely in line" with Fed projections, and while the panel's forecasts for this year were revised slightly lower at the most recent summary of economic projections, "the differences between the central tendencies reported in June and September were statistically and economically insignificant," Plosser said.
As the Fed's balance sheet grows from these purchases, it complicates the exit process, Plosser warned, noting that it is unclear how much the buys are helping the economy. "There is little evidence that continued efforts to increase accommodation through asset purchases will lead to any significant improvement in the labor markets or economic growth. Thus, I believe the time has come for an expeditious phase-out of the purchase program," he said.
While the recovery has been slower than expected, Plosser said, he pointed to progress including "signs of broad-based underlying strength in the economy." Anecdotally, he said he hears concern about uncertainty in fiscal policy and the stalemate in the capitol as restraining factors.
The economy should grow about 3% next year, with jobless rates close to 7% late this year or early next year, dropping to about 6.25% at the end of 2014, with inflation expectations holding and inflation creeping up to near the Fed's 2% target.
Finally, Plosser suggested that some of the drop in labor force participation was due to "transitory factors," longer-term structural adjustments caused by demographics and technological advancements are also occurring. "Monetary policy would be ineffective in counteracting such demographic and secular trends - and it should not be used to try to do so."
