The Federal Open Market Committee should define the amount of assets it will purchase under QE3 and stop when that limit is reached, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Monday.
"We need to define simple, clear dimensions to 'right-size' the [asset-purchase] program," Plosser told the Risk Management Association, according to prepared text released by the Fed. "This will reduce policy uncertainty and move the economy forward. My preference would be for the FOMC to announce a fixed amount for QE3, just as we did for the two prior rounds of asset purchases. When we reach that amount, we should stop the asset purchases, and then reassess the state of the economy to determine if further action would be beneficial. At that point, monetary policy would still be highly accommodative."
Plosser said the FOMC said it would continue the asset purchases until the labor market outlook "improved substantially in the context of price stability." He said this point has come and "we should begin to wind down these asset purchases."
Despite public expectations of a tapering at the two most recent meetings, the FOMC didn't adjust the rate of purchases and continues to reinvest maturing or prepaid securities. "As a result, the Fed's balance sheet is now just shy of $4 trillion in assets and growing at a pace of about $85 billion a month," Plosser said. "The decision to maintain the pace of purchases in September and await more evidence of sustained economic progress came as quite a surprise to the public, generating widespread public debate about the FOMC's communications surrounding its policy intentions."
Allowing expectations of tapering and not following through "undermines the credibility of the FOMC," he reiterated, "and reduces the effectiveness of forward guidance as a policy tool. The failure to follow through also contributes to additional uncertainty regarding the future course of monetary policy."
Not tapering signals the FOMC's concern about the sustainability of the growth.
"These were not the messages that I wanted to send," Plosser noted. "So, I disagreed with the decision not to go forward with a modest reduction in the pace of our asset purchases."
The failure to taper shows "how difficult it is to fine-tune our open-ended asset purchases and our forward guidance about them. We cannot continue to play this bond-buying game by ear and risk the Fed's credibility while creating lingering uncertainty about the course of monetary policy," Plosser said.
Once the FOMC sets a limit for QE3 purchases and the program concludes, Plosser said, "We should then reassess the economic trends and the outlook to determine if further efforts to increase accommodation are required. This approach would also yield a simpler program — one that is easier for policymakers to manage, easier to explain to the public, and easier to exit when the time comes."