Bloomberg News

Plosser Says Fed MBS Purchases May Be Breach Into Fiscal Policy

February 24, 2012

Feb. 24 (Bloomberg) -- Philadelphia Federal Reserve Bank President Charles Plosser said that central bank purchases of mortgage-backed securities may be an inappropriate foray into policy that should be conducted by the U.S. Treasury.

“When the Fed engages in targeted credit programs that seek to alter the allocation of credit across markets, I believe it is engaging in fiscal policy and has breached the traditional boundaries established between the fiscal authorities and the central bank,” Plosser said according to prepared remarks of a speech he’s giving in New York today.

Federal Reserve Chairman Ben S. Bernanke and the Federal Open Market Committee are debating a new round of mortgage bond purchases to help boost the housing market and the economy.

“Central banks and monetary policy are not and cannot be real solutions to the unsustainable fiscal paths many countries currently face,” Plosser said on a panel at the University of Chicago’s Booth School of Business 2012 U.S. Monetary Policy Forum. “The only real answer rests with the fiscal authorities’ ability to develop credible commitments to sustainable fiscal paths.”

Plosser, the 63-year-old former professor who has led the Philadelphia Fed since 2006, has said he opposed the Federal Open Market Committee’s January statement that interest rates may need to be kept near zero through at least late 2014, replacing an earlier pledge to keep borrowing costs low through mid-2013.

‘Market Distortions’

“The problem is not just inflation risk down the road,” Plosser said in a speech last week in Newark, Delaware. “Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources.”

Plosser, who doesn’t vote on the FOMC this year, dissented from the Fed’s decisions in August and September to increase stimulus, citing higher inflation and lower unemployment in 2011.

Plosser said he was alarmed by growing pressure on central banks to allocate credit to specific sectors of the economy, to use its lender of last resort authority and to raise inflation rates.

“Despite the well-known benefits of maintaining stable prices, there are calls in both Europe and the U.S. to abandon this commitment and create higher inflation to devalue outstanding nominal government and private debt,” said Plosser.

‘Inflation Tax’

“Such an inflation tax would transfer wealth from those who have lent money, in good faith, to the borrowers,” he said. “Inflation is a blunt and inappropriate instrument for assigning winners and losers from profligate fiscal policy or excessive borrowing by private individuals and firms.”

The Labor Department said that the economy added 243,000 jobs in January and the unemployment rate fell to 8.3 percent, the lowest jobless rate in three years.

Bernanke said in testimony before the Senate Budget Committee last week that the jobless rate masks weakness in the labor market. Unemployment doesn’t include people who only have part-time jobs or who are out of the labor force because they have given up searching for work, Bernanke said.

--Editors: Paul Badertscher, Gail DeGeorge, Kevin Costelloe

To contact the reporter on this story: Joshua Zumbrun in New York at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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