WASHINGTON — Philadelphia Federal Reserve Bank President Charles Plosser told a Pennsylvania bankers group that the unwinding of the Fed's highly accommodative policy will be difficult and "potentially disruptive."
Plosser, who doesn't vote on the Fed's policymaking Federal Open Market Committee this year, told the Pennsylvania Association of Community Bankers that "unwinding from a very large and growing balance sheet of long-duration assets will be difficult, potentially disruptive, and poses significant risks."
Plosser's conversation with Nick Francesco, president of the PACB, took place in July and was reprinted in this month's issue of Transactions, the association's own publication.
He said the risks "far outweigh the meager benefits of the Fed's asset purchases for the real economy. That's why I have been an advocate for reducing the pace of purchases, with the goal of ending them before the end of the year."
The FOMC began its meeting in Washington Tuesday at 1pm ET, and members of the committee have been mostly quiet since last Monday.
Plosser stressed that a move to pull back from the current level of $85 billion in long-term assets the Fed is buying each month isn't a tightening of policy. This reiterates what several members of the FOMC have said on the topic as they tried to calm market fears since the last meeting.
"I want to emphasize that reducing the pace or even ending asset purchases need not be the start of an exit strategy or tightening of monetary policy," he said. "Rather, these actions would slow and then halt efforts to continually expand the level of accommodation by increasing the size of the balance sheet. Monetary policy will remain very accommodative with the primary policy instrument, the federal funds rate, near zero and the Fed's balance sheet very large."
Plosser said he believes the Fed should return to "operating in a system where the federal funds rate is the primary policy instrument." The Fed funds rate has been held near zero since Dec. 2008, and the Fed pledges to keep rates low until unemployment reaches 6.5% and inflation stays close to its 2% target.
The markets mostly expect the Fed to begin pulling back on its QE3 program which currently consists of $45 billion a month in Treasuries and $40 billion a month in MBS. Plosser said in the panel discussion that as the Fed pulls back, "the balance sheet should shrink in size to enable such a system to operate, and the composition of the Fed's balance sheet should return to all U.S. Treasuries."
Plosser also said he thought the FOMC should provide more information about the factors that will influence its policy decisions. "Not only will this enhance transparency but it also will impose discipline on policymaking," Plosser said. "If policymakers choose to deviate from the guidelines, they are forced to explain their actions and when they anticipate returning to more normal operating practices."
He added that transparency and openness "are important and good things for the Federal Reserve. The better the public and the markets understand how policy is likely to be adjusted as the economy changes, the more predictable policy becomes, which promotes price stability and better economic outcomes."
Plosser said Chairman Ben Bernanke's press conference following the June meeting was a step in the right direction. "The intention was to add clarity by providing more information. You may disagree with the forecast, or you may have a different forecast, but the FOMC was striving to provide more information about the factors that are driving policy," he said.
Bernanke will hold a press conference Wednesday at 2:30pm ET after the FOMC meeting.
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