Further monetary policy accommodation was not clearly needed when the Fed pulled its Twist, and the action taken “will do little to improve the near-term prospects for economic growth or employment, but they do pose some real risks,” Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, said Wednesday.
Plosser said his “no” vote was partly due to higher inflation and lower unemployment seen since QE2 was launched.
“Policy actions are not free and should be evaluated based on the costs and benefits,” he told a realtors conference, according to a prepared text.
The move, he estimated, would only cut about 20 basis points from long-term rates, with “considerably less” pass-through to consumers and businesses that are looking to borrow funds.
“Thus, I am skeptical that this will do much to spur businesses to hire or consumers to spend, given the ongoing adjustments occurring in the economy and the uncertainties posed by the fiscal challenges both here and abroad,” he said.
The policies could spur a continued steady rise in inflation, “creating an environment of stagflation … an outcome we must carefully guard against,” he said.
Maintaining the Fed’s credibility is also important, and helps it support “price stability and promote economic growth.” Plosser said,
“In my view, the actions taken in August and September risk undermining the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery,” he said.