Federal Reserve Bank of Philadelphia President Charles Plosser said he sees no need now for more monetary stimulus while noting fundamental strength in the economy.
“I think there is underlying strength there that is still there,” Plosser said today in an interview with Bloomberg Television in Washington.
Fed officials, taking stock of slower U.S. growth than forecast, are starting to consider policy options for increasing monetary stimulus even as they prepare to eventually raise interest rates from almost zero and shrink a record balance sheet. Options include restarting asset purchases, Fed Chairman Ben S. Bernanke said in congressional testimony last week.
“I haven’t changed my forecast very much,” Plosser said. “I’m waiting for some of the noisiness in the data to sort of clear up over the course of the rest of the summer and early into the fall,” he said, referring to recent data on the economy influenced by the end of the housing tax credit or temporary hiring for the U.S. census.
Bernanke said last week that one option to aid the economy is to enhance the Fed’s pledge for low rates. Last year, Canada’s central bank made a specific time commitment. Another alternative is to lower the 0.25 percent rate the Fed pays on the $1 trillion of banks’ excess reserves.
“I don’t think there is any role for the Fed at least in the near term,” Plosser said of calls for further policy easing. “Of course things could change. The economy could take a much worse path.”
‘Ammunition’ Available
If the economy worsens, Fed policy makers “have ammunition to act if we want to,” said Plosser, 61, who joined the Philadelphia Fed as its chief in 2006. “But I would caution people that the Fed will look at both the costs and benefits of any action that we undertake,”
Fed presidents rotate voting on monetary policy, with Plosser voting next year.
“The Fed has supplied a lot of liquidity to the system right now,” Plosser said. “We have to proceed very cautiously.”
Reducing the interest rate on excess reserves or purchasing additional assets could have undesirable consequences, he said.
“Lowering the interest rates closer to zero could have very disruptive effects on the financial markets,” Plosser said. “If we bought Treasury bills we could un-anchor expectations of inflation because the public might begin to think we are going to buy up the public debt.”
Renewed Strength
Plosser said the U.S. economy may exhibit renewed strength. “I think the strength was there before the noise came in,” Plosser said. “I see some clouds on the horizon, if you will, with some increased risk due particularly to Europe and how that might play out. But I think as we go through we will see confidence return.”
Growth in U.S. gross domestic product slowed to a 2.7 percent annual pace in the first quarter, compared with a 3 percent estimate issued in May and a 5.6 percent rate in the last three months of 2009.
Sales of U.S. new homes rose in June more than forecast following an unprecedented collapse the prior month, a signal the worst of the slump triggered by the end of a government tax credit is over.
Purchases increased 24 percent from May to an annual pace of 330,000, figures from the Commerce Department showed today in Washington. The rate was the second-lowest in data going back to 1963 after May’s downwardly revised 267,000 pace.
“The consumer will come back,” Plosser said. “Businesses will begin investing again, they were very aggressive in the first part of this year.”
By Joshua Zumbrun and Michael McKee – bloomberg.com
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