Fed’s Plosser: Monetary policy has its limits
Monday January 17, 2011, 7:39 am EST
WASHINGTON (Reuters) – Monetary policy cannot speed up labor market healing or prevent asset price bubbles, and counting on it to do so may do more harm than good, a top U.S. Federal Reserve official said.
In a speech to be delivered in Santiago, Chile, on Monday, Philadelphia Federal Reserve Bank President Charles Plosser cautioned against relying too much on the central bank, and said its powers ought to be curbed to prevent abuse.
“I believe we have come to expect too much from monetary policy,” he said in his prepared remarks. A copy was made available in Washington before the speech.
“Monetary policy is not going to be able to speed up the adjustments in labor markets or prevent asset bubbles, and attempts to do so may create more instability, not less.”
Plosser, a well-known inflation “hawk,” rotates into a voting slot this year on the Fed’s monetary policy-setting panel, the Federal Open Market Committee. The last time he had a vote, in 2008, he dissented twice because he thought the committee was lowering interest rates too aggressively.
He has also questioned the effectiveness of the Fed’s current $600 billion bond-buying program, and said last week it could backfire unless the central bank gradually changes course to head off inflation.
In Monday’s speech, Plosser said monetary policy’s ability to neutralize the economic consequences of shocks such as rising oil prices or a sharp downturn in the housing market was “quite limited”.
“Asking monetary policy to do what it cannot do with aggressive attempts at stabilization can actually increase economic instability rather than reduce it,” he said.
He said the central bank, through some of its emergency lending programs set up during the depths of the financial crisis in 2008, had “crossed the Rubicon” into fiscal policy that should be the responsibility of Congress.
(One has to love this last sentence above. Which has any idea or possibility about collecting accurate or meaningful data – the Congress or the Fed? You had better thank God that the Fed exists, IMHO)
http://finance.yahoo.com/news/Feds-Plosser-Monetary-policy-rb-837039911.html?x=0&
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