Federal Reserve Bank of Philadelphia President Charles Plosser said Thursday that the dollar’s slide over the last few months isn’t surprising and reflects the stabilization of global financial markets.
“A lot of the decline of the dollar over the last year has just been reversal of the run-up after the panic,” Plosser told reporters. “Growth has returned and panic has subsided. There is no particular reason why you wouldn’t expect the dollar to go back to where it was before the panic set in.”
The U.S. government has historically let the dollar fluctuate, and a weaker dollar in recent years can be understood as a market response to imbalances in the U.S. current account, Plosser said.
He also said the dollar “is not the target or goal of (U.S.) monetary policy.”
As an instrument to tackle asset price bubbles, monetary policy alone isn’t adequate, he said, and that more research should be made on the issue of whether there’s a connection between policy rates and such bubbles.
The U.S. economy appears to have turned the corner and is in recovery, and it’s “way too early” to tell if a second stimulus package will be needed, he said. The economy isn’t showing signs of any threat of inflation, he added.
Excess reserves placed by commercial banks with the Fed represent the biggest danger of inflation, even though there are no signs that banks have started to draw these funds, now worth around $1 trillion, he said.
“We must prevent liquidity from flooding the economy,” Plosser said. In response to a question on the future direction of Fed policy rates, he said the Fed is already conducting a policy reversal focused on emergency measures set during the recent financial crisis, but it’s unclear when rates will rise.
Plosser also said that historical parallels with Fed policy in response to previous economic meltdowns should be taken with caution, given the unique nature of each crisis. This comment came as response to a question on remarks made Wednesday by Federal Reserve Bank of St. Louis President James Bullard, who said U.S. policy rates may remain at near-zero levels until 2012, if recent historical trends hold.
By David Roman and Se Young Lee – online.wsj.com
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