Fed’s Plosser: Don’t see need for asset buys now

By Kristina Cooke

PHILADELPHIA (BestGrowthStock) – A Federal Reserve official who has been vocal in his opposition to the central bank buying more assets repeated on Wednesday that he doesn’t see the need for more easing at this time.

Philadelphia Federal Reserve Bank President Charles Plosser said he holds this view because he does not currently see “a great fear” of deflation and that he could change his mind based on incoming data.

Markets expect the U.S. central bank to say at its next meeting in early November that it will buy more longer-term assets, most likely Treasury bonds, to further support the U.S. economy.

“I don’t see the pay-offs for unemployment as very great and I don’t see the necessity of it at this point given my forecast on inflation,” Plosser told reporters after giving a speech to the Union League of Philadelphia.

“But there are two costs down the road: doing something that doesn’t have any effect which is bad for the credibility of the Fed and the other cost is … how complicated does it make our exit strategy?”

Plosser’s doubts that the benefits of more easing outweigh the costs appears to be the minority view at the central bank. Fed Chairman Ben Bernanke on Friday gave his clearest signal yet that more easing is on the horizon.

The purchases would be on top of the $1.7 trillion the Fed has already bought to spur recovery from the worst financial crisis since the Great Depression. The Fed embarked upon the asset purchases after cutting interest rates to the bone in 2008.

Asked whether market expectations would play into the Fed’s decision, Plosser said the central bank needs to focus on the long-term.

“We need to make the right decision for the longer horizon. And if the right decision means we disappoint markets, then that might be short-run painful but is the right long-run decision,” he said. Plosser moves into a voting role on the Fed’s policy-setting committee next year.

“Currently given my forecast, it’s not obvious to me today that the benefits (of further asset purchases) outweigh the costs,” Plosser said. He would change his mind if he saw a real risk of deflation, he said. “I’m symmetrical like that,” he said.

Plosser expects inflation to move back to the 1.5 – 2 percent range next year, roughly in line with the Fed’s informal inflation target.

Plosser said at this point it is not clear that more purchases will be effective.

“Do we really think that creating another trillion dollars of excess reserves is going to solve our problems?” he asked.

Fed officials have been discussing ways to strengthen their communication strategy, including targeting inflation.

“I have been a proponent of inflation targeting, I still am a proponent of inflation targeting. But the (policy-setting) committee as a whole don’t seem to have gotten there yet,” Plosser said.

He said a proposal to target slightly higher inflation for a while to make up for lower inflation now — known as price-level targeting — would involve “some challenges.”

(Editing by Chizu Nomiyama)

Fed’s Plosser: Don’t see need for asset buys now