EU package may ease strains, Fed’s Plosser says

By Ann Saphir

MINNEAPOLIS (BestGrowthStock) – A $1 trillion European rescue package to contain an escalating debt crisis will “hopefully” prevent financial turmoil from spilling over into the United States, Charles Plosser, president of the Philadelphia Federal Reserve Bank, said on Monday.

“This is a package that’s hopefully going to alleviate some of those concerns and put fiscal sustainability higher on the agenda for many of these countries,” Plosser said in the first public comments by an official of the Fed — the U.S. central bank — since the bailout was announced.

Separately, the Wall Street Journal said on its website the Federal Reserve Chairman Ben Bernanke is planning to defend the U.S. central bank’s dollar lending program to the European Central Bank before lawmakers Tuesday.

On Sunday, the Fed reopened currency swap facilities, in which it funnels U.S. dollars to the European Central Bank and other central banks overseas, to help ease market strains in Europe as EU officials met late into the night to stitch together the rescue package.

Fed officials, who have been criticized for secrecy, are also preparing to release agreements between the Fed and other central banks involved in the lending program, in addition to releasing weekly updates of how much each central bank draws down, the newspaper said.

The Fed could not be immediately reached for comment on the Wall Street Journal report.

Battered global stock markets cheered the European aid plan on Monday, but the euphoria dimmed in Asia on Tuesday on worries about how Greece and other debt-laden euro zone countries will reduce their budget deficits. Some economists warn Greece’s debt problems alone will take years to clear up.

BAILOUT DEBATE

Minneapolis Fed President Narayana Kocherlakota suggested legislative efforts to prevent government bailouts in the United States would be futile.

“Policymakers inevitably resort to bailouts even when they have explicitly resolved, in the strongest possible terms, to let firms fail,” he said.

Rather than try to eliminate bailouts, policymakers should impose a tax on banks that rises as banks take on more risk, he said.

Taking a different tack, James Bullard, president of the St. Louis Fed, said he would support limits on bank size to prevent future taxpayer bailouts. Bullard’s comments were made May 6 in St. Louis and released on the bank’s website on Monday.

Plosser also said that while it is not time for policy makers to raise benchmark interest rates, the Fed could raise rates slightly without slamming the brakes on economic growth.

“Even if interest rates were at 1 percent, that would still be pretty accommodative monetary policy,” Plosser said.

The Fed slashed its short-term interest rates to near zero in December 2008, and renewed its vow two weeks ago to keep them exceptionally low for an “extended period.”

“There’s some argument that some might make that just getting away from the zero lower bound would help markets begin to function better, but I don’t think we’re necessarily ready for that, at least not right now,” said Plosser, who is not a voter on the Fed’s policy-setting panel this year.

Still, he said there is some “upside risk” to his forecast for a tepid recovery.

“The U.S. economy is historically remarkably resilient, and we may be underestimating its ability to bounce back from this,” he told CNBC on Monday.

When it comes time to tighten financial conditions in the United States, the Fed needs to take action on several fronts, he said.

“It’s going to be a combination of raising the (benchmark federal) funds rate, raising our target interest rate, … shrinking our balance sheet and changing its composition from (mortgage-backed securities) and Treasuries to all Treasuries,” he said.

Stock Market Report

EU package may ease strains, Fed’s Plosser says