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 Philadelphia Fed President Charles Plosser's criticism of the policy
stimulus is unlikely to sway new Chair Janet Yellen and the majority
of Fed policymakers, whose position was reinforced on Wednesday by
Dennis Lockhart of the Atlanta Fed.
While Lockhart, a centrist, said in Birmingham he was comfortable
with the current pace of trimming accommodation, Plosser's speech
suggests he could dissent if the Fed continues trimming the
purchases by only $10-billion monthly increments at future meetings,
as most economists expect.
The central bank is now buying $65 billion per-month in Treasuries
and mortgage bonds to depress borrowing costs in the U.S. economy,
which was slow to recover from the 2007-2009 recession but
strengthened toward the end of last year.
It trimmed the so-called quantitative easing program by $10 billion
in each of the last two months and is expected to continue doing so
until it stops the stimulus altogether around the autumn.
But Plosser, who backed last week's cut to the program, warned of
looming communications problems if the central bank keeps buying
assets while, as he expects, the U.S. unemployment rate falls below
6.5 percent some time in the first half of 2014, from the current
6.7 percent.
A voter on U.S. monetary policy this year, he argued that labor
market conditions are "improving rapidly" and inflation, while low
at just over 1 percent, "has stabilized" and is expected to
strengthen.
"The longer we continue purchases in such an environment, the more
likely we will fall behind the curve in reducing the extraordinary
degree of monetary policy accommodation," Plosser told an economic
seminar in Rochester, New York.
"With the economy awash in reserves, the costs of such a misfire
could be considerably higher than usual, fomenting higher inflation
and perhaps financial instability."
NEAR UNANIMOUS POLLS ON QE
Beyond the asset purchases, the Fed has promised to keep interest
rates near zero until well past the time unemployment falls below a
6.5-percent threshold, especially if inflation remains low.
Though the Fed has stressed that the two easy-money policies — bond-buying and low rates — are separate, Plosser said
"communications problems" loom if the economy continues to gather
strength, as he expects.
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"My preference is to scale back our purchase program at a faster
pace to reflect the strengthening economy," he said.
"I would like to see purchases concluded before the unemployment
rate reaches the threshold, which is likely during the first half of
the year."
While fellow hawk Richard Fisher, head of the Dallas Fed, has backed
$20-billion cuts to the purchases, polls of economists show near
unanimous expectation that the central bank will stick to
$10-billion reductions at each meeting until the purchases end by
the autumn.
Lockhart doubled down on that message on Wednesday.
"Absent a marked adverse change in the outlook for the economy, I
think it is reasonable to expect a progression of similar moves,
with the asset purchase program completely wound down by the fourth
quarter of the year," he told the Rotary Club of Birmingham.
Lockhart called the $10-billion step-downs in asset purchases the
"default mode," although policymakers could adjust the pace if
necessary.
The Fed wants to be sure the labor market, still plagued by low
participation, will not stumble again on the path to recovery from
the 2007-2009 recession. The jobless rate for January is due from
the government on Friday.
The Fed's next policy-setting meeting is March 18-19, the second of
eight scheduled for this year. But Yellen, who was sworn in as chair
on Monday, could clarify her position at congressional testimony on
February 11 and 13 next week.
(Reporting by Krista Hughes and Jonathan
Spicer; editing by Andrea Ricci)
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