NEW YORK - New York Federal Reserve Bank President William Dudley Friday said the climate of very low interest rates likely increases the size of fiscal "multipliers" and thus requires care in the size of fiscal stimulus the federal government provides.
Dudley also said that, despite losses to those who receive interest payments, the Fed's policy of lowering rates is a net plus for the economy.
Philadelphia Fed President Charles Plosser, appearing with Dudley on a panel at a University of Chicago Booth School of Business monetary policy forum, stressed the need for a "credible" plan of deficit reduction.
Simply saying that future Congresses will reduce deficit spending is not credible, said Plosser.
Plosser said he does not think the fiscal multiplier -- the degree to which a given amount of deficit spending will increase GDP -- is very high. Dudley differed, particularly in a climate of very low rates.
"In the current environment where we're at the zero bound and interest rates are very low, it's probably fair to say that the fiscal multipliers are higher," said Dudley, but he added that therefore the government has to be "somewhat cautious about how much fiscal (stimulus) is put into the economy."
In earlier prepared remarks, Plosser said the Fed had veered into fiscal policy by purchasing mortgage-backed securities and other programs, and he argued for a "new accord" between the Fed and Treasury to draw "a bright line" between monetary and fiscal policy.
But Dudley disputed Plosser's concerns.
"I would argue that to date the Federal Reserve has not engaged in anything that constitutes fiscal action," he said. "Our interventions brought financial stability, which is very much the province of the central bank."
Dudley also observed that the Fed has "not lost a penny" on its various credit facilities designed to help financial institutions that suffered insolvency during the financial crisis.
"Despite a very bad macroeconomic environment our actions did not step over line into the fiscal arena," he said, adding that "certainly from a financial stability perspective ... it is very much in the province of the central bank."
The Fed "can't fulfill its mandate of maximum employment and price stability" without price stability, Dudley said.
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