The Federal Reserve cannot stop or immediately offset macroeconomic shocks that threaten economic stability and the public needs to realize that “there are limits to what central banking can do,” Federal Reserve Bank of Philadelphia president Charles I. Plosser said yesterday.
While some have called for the Fed to assume expanded responsibilities as a result of the crisis facing the country, he said, there must be a realization of the central bank’s limits.
“The Fed needs to be accountable for meeting its goals. Yet, we must take care to set reasonable expectations for what a central bank can achieve,” Plosser said in a speech to the Council on Foreign Relations in New York, according to text of the remarks released by the Fed. “We must recognize that over-promising can erode the credibility of a central bank’s commitment to meet any of its goals, whether for monetary policy or financial stability.”
Some believe “if the Fed were simply quicker or smarter or given more regulatory powers by Congress, we could always counteract the adverse effects of these shocks and easily achieve monetary policy’s dual mandate to keep the economy growing with full employment and little or no inflation,” Plosser said.
But this does not distinguish “between what the Fed can do in the long run and what it might be able to do in the short run,” he said, and “it assumes the Fed has the ability to stabilize the economy against the adverse effects of almost all macroeconomic shocks. On both counts, this view seriously overstates the true capability of the Fed or any central bank in modern market economies.”
