Philadelphia Federal Reserve President Charles Plosser is in the news, advocating an accelerated tapering and early end of the Fed’s bond and mortgage-backed securities purchases known as QE3.
Plosser, never a fan of the program, is concerned that if the Fed continues the practice that some see as “money printing” after unemployment reaches the 6.5% benchmark, that the market may lose faith in the Fed’s forward guidance. As a voting member of this year’s Federal Reserve Open Market Committee (FOMC,) which sets policy, Plosser’s words carry more weight than those Fed officials who do not have a voting seat.
His argument for faster taper, which he says should ideally be ended by the end of the first half of the year, is :
- He sees employment “improving rapidly,” and expects that the official unemployment rate will fall below the Fed’s threshold of 6.5% before July. If the Fed continues to buy bonds and MBSs, it could cloud forward guidance of Fed policy. Plosser stated “I would like to see purchases concluded before the unemployment rate reaches the threshold, which is likely during the first half of the year.”
- Inflation has stabiized, in his view, and if the Fed does not act pre-emptively, could shoot past its 2% target. “With the economy awash in reserves, the costs of such a misfire could be considerably higher than usual, fomenting higher inflation and perhaps financial instability,” he said.
- Plosser believes that the economy is well on the way to recovery, predicting a 3% growth of GDP for the year as a whole. “The economy has met the criteria of significant improvement in labor market conditions” for ending the quantitative easing program, Plosser said. “Further increases in the balance sheet are unlikely to provide appreciable benefits for the recovery.”
While Plosser has company in his views, (Dallas Fed President Richard Fisher is on record as supporting a doubled rate of tapering to $20 billion per month,) others are not sold on the idea. Atlanta Fed President Dennis Lockhart has been a big fan of quantitative easing. While supporting the current rate of reduction of the extraordinary measures, he says that the Fed must reserve the right to halt the taper, or even reverse it, as economic data comes in.
New Fed Chairman Janet Yellen was also a support of the bond purchasing program as the #2 person at the Fed during Ben Bernanke’s tenure, and likely represents the majority view. It is worth noting however, that President Obama has nominated former Bank of Israel chairman Stanley Fischer to fill Yellen’s former spot as Fed Vice Chairman. Fischer is one of the most well-regarded central bankers in the world. His specialty? Fighting hyperinflation.