Federal Reserve Bank of Philadelphia President Charles Plosser said Wednesday he is uncomfortable with the central bank’s current pledge to keep rates low for an “extended period,” saying what happens with the monetary policy outlook depends on the economy’s path.
“I am not a big fan of that language,” Plosser said. The words “confine us in some ways,” he said. That’s not because the Fed won’t act if conditions change, but because language like that conditions financial markets to hold an interest-rate outlook that may not come to pass, the official said.
Plosser is not currently a voting member of the interest-rate-setting Federal Open Market Committee. When that body last met in January, it pledged to keep something like its current near-zero interest-rate policy in place for an “extended period.” One Fed official voted against that decision then, believing the language was incompatible with a recovering economy.
Plosser said whatever the Fed does with policy, “it’s all going to depend on economic conditions.”
The central banker also argued in favor of the Fed moving toward sales of mortgage assets bought under a $1.25 trillion program that ends in March. The effort was designed to keep borrowing costs low and help support both the housing sector and a broader economic recovery. But it’s also left the Fed’s balance sheet swollen at over $2 trillion. Policy makers are now contemplating how they will unwind this program at some point in the future.
“As the economic recovery gains strength and monetary policy begins to normalize, I would favor our beginning to sell some of the agency mortgage-backed securities from our portfolio rather than relying only on redemptions of these assets,” he said. “It will take some time for the Fed’s portfolio to return to its precrisis composition, but we should begin taking steps in that direction sooner rather than later.”
While he did not put a time frame on the sales, the policy maker said it needs to happen eventually. Plosser said he imagines sales of mortgages will start off at “modest” levels, with the Fed laying out some sort of formal plan for the selling, similar to how it laid out the buying agenda.
“We have no desire to disrupt the mortgage market and tank the economy,” so whatever happens will be done “delicately,” he said, adding he does not expect to see much of a rise in mortgage rates as the Fed exits the market.
The official said it is “an open question” what the Fed’s tightening cycle will look like. “I am not opposed and I might even favor beginning to shrink the balance sheet before we raised rates…because ultimately, the balance sheet has got to get down,” Plosser said. In part, that’s because the effectiveness of some of the other ways the Fed can tighten financial conditions is uncertain
right now, he said.
Minutes of the FOMC meeting released Wednesday show a growing desire on the part of some central bankers to do asset sales. That said, most Fed officials appear confident the balance sheet will not create an inflationary threat because the central bank has the ability to pay interest on the reserves.
Plosser also offered brief comments on the state of the economy. “Although we have yet to see robust employment growth, there are signs that labor market conditions are starting to slowly improve and it appears that a modest economic recovery has begun,” Plosser said. “Financial market conditions are considerably better than they were a year ago, and the worst of the financial crisis now appears to be behind us.”
Plosser’s remarks came from a speech in Philadelphia, where he spoke before the World Affairs Council, taking questions from both the audience and the press.
In other comments, the central banker said he believes the legal authority that gives the Fed its emergency lending power “should be either eliminated or severely curtailed,” with this sort of lending done only by the government.
If the Treasury requests the Fed to take part in a market intervention or bailout, “any non-Treasury securities or collateral acquired by the Fed under such lending should be promptly swapped for Treasury securities,” Plosser said. That way, “it is clear that the responsibility and accountability for such lending rests explicitly with the fiscal authorities, not the Federal Reserve,” the official said.
Plosser also said that the dollar’s strength depends on sound U.S. economic policy and low inflation. He said that the current government deficit is unsustainable and warned that it may become more difficult to sell Treasury securities, which could drive up borrowing rates in the economy.