Philadelphia Fed’s Charles Plosser Warns of Risks from QE Forever

In addition to Richmond Federal Reserve’s Jeffrey Lacker, the Fed’s recent QE ‘forever’ has elicited another dissenting insider opinion.

Federal Reserve Bank Bank of Philadelphia President Charles Plosser says that the FED’s measures will not only miss attaining the targeted economic goals but would lead to hefty unforeseen risks.

Here is why employment goals won’t be reached, from SFGate/ Bloomberg, (Bold emphasis mine)

Federal Reserve Bank of Philadelphia President Charles Plosser said new bond buying announced by the Fed this month probably won’t boost growth or hiring and may jeopardize the central bank’s credibility.

“We are unlikely to see much benefit to growth or to employment from further asset purchases,” Plosser said in a speech today at the district bank in Philadelphia. “Conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.”…

Plosser said today that central banks can’t effectively target employment levels the same way they can guide inflation rates because hiring also depends on variables unrelated to monetary policy, such as technology, education and tax rates.

“It doesn’t make sense to say that there is a particular unemployment rate that we can achieve,” Plosser told reporters after his speech. “The problem with the labor markets is there are many things that affect employment and unemployment that are beyond the control of the Fed.”

Mr. Plosser acknowledges that in a highly complex world, oversimplified centralized or political solutions can lead to unintended consequences.

Mr. Plosser fails to add that policies such as added taxes and regulations impact investments (aside from monetary policies) and thereby employment levels. The mainstream's favorite indicator, employment, represents an effect from business spending and not the cause.

Small businesses which make up the bulk of the source of US employment has been suffering from tax and regulatory policies (chart from advisor perspectives).

I would like to point out that while poor sales has also been an important concern, poor sales are symptoms of an underlying disease.

Relative economic freedom, the US has been on a decline since 2000 or when the FED began to massively inflate the system (chart from Cato Institute)

Mr. Plosser also believes that the Fed’s latest QE will lead to significant risk of consumer price inflation…

“I opposed the Committee’s actions in September because I believe that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment,” Plosser said. “Every monetary policy action has costs and benefits, and my assessment is that the potential costs and risks associated with these actions outweigh the potential meager benefits.”…

The Fed’s “hard-won credibility” is crucial because if the public doesn’t have confidence in policy makers, their ability to set effective monetary policy will be harmed, hurting households and businesses, Plosser said. If people believe the central bank will delay raising rates, they may “infer that the Fed is willing to tolerate considerably higher inflation,” spurring an increase in inflation expectations that would require a response from the FOMC, Plosser said.

“The Fed’s most recent actions carry with them significant risks,” Plosser said. “I am not forecasting that those risks will necessarily materialize and I hope they will not. But if they do, they could prove quite costly to the economy.”

And Mr. Plosser suggests that the Fed has been trapped, where exiting from current measures would likely be highly disruptive.

Plosser said in response to audience questions that he’s “worried that the actions we are taking to make our balance sheet bigger entail risks and those risks could be quite substantial.”

The central bank may “be forced into selling assets in the open market” when it needs to reduce stimulus, he said. Policy makers “must be aware of the consequences,” from their decisions.

In short, Mr. Plosser warns of two possible consequences from current the policy of QE forever: massive inflation or boom bust cycles, both of which would only destabilize the US and global economies.

Mr. Plosser’s warning eerily resonates with the admonitions of the great Professor Ludwig von Mises

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.