WASHINGTON (MNI) – Philadelphia Federal Reserve Bank Pres. Charles
Plosser, a current FOMC voter, Thursday told CNBC any additional
quantitative easing doesn’t “really meet the cost/benefit test right
now.”
Plosser, interviewed at the site of the Jackson Hole symposium
where Fed Chairman Ben Bernanke speaks Friday morning, said he does
think QE3 could lower interest rates “somewhat” further. “But we’ve got
to remember it’s not that simple in terms of the challenges and
headwinds the economy face.”
As to any QE3, “Like a lot of policy it’s a cost-benefit analysis,”
Plosser said. “I don’t think it really meets the cost-benefit test now.”
The key to evaluating QE3, he said, is to know what’s going on in
the economy. “There’s the consumer and businesses,” he continued. “We’ve
faced a huge amount of loss of wealth on the consumer side, the loss of
housing. The reaction to that, of course, the natural reaction is to
save more.”
While it is “healthy” for consumers to want to save more and
restore their balance sheets, “On the other hand, what policy is doing,
is trying to push down interest rates, so the consumer doesn’t save,
that in fact, (it) wants them to spend, to move spending from the future
to the present.”
“The problem,” he continued, “the consumers say we don’t
want to spend so lowering interest rates as much as we have over the
course of this recession, the consumers are still trying to save and
with low interest rates, it means they have to save even more.”
On the business side, “huge amounts of uncertainty” prompt
businesses not to invest,” Plosser said. “So the consumer wants to save,
doesn’t want to spend, businesses don’t want to invest because they are
facing uncertainty and both of those headwinds are not something that
monetary policy can fix.”
That doesn’t necessarily mean another recession, he said. “That’s
going to have to run its course. Monetary policy doesn’t create wealth.”
“The best we can do,” he said, “is best try to rearrange it a
little bit and even that’s hard to do and under the circumstances we’re
facing now it’s particularly difficult for monetary policy to do.”
The costs of any additional easing are in the future, Plosser said.
“There’s the risk when all the excess reserves in the economy begin to
flow out, that’s when the risk of inflation will begin to materialize.”
And eventual tightening itself might cause a new recession,” he
added. “Right now it’s just a risk,” and part of the cost-benefit
analysis that has to be taken into account when considering additional
easing.
** MNI Washington Bureau: 202-371-2121 **
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