Fed’s Plosser: If Fed eases, it needs to be clear about why

September 30, 2010

Even the Federal Reserve official who is one of those most opposed to further financial easing by the U.S. central bank has thoughts about how the Fed ought to do it.

CZECH/Philadelphia Federal Reserve Bank President Charles Plosser on Wednesday told reporters in Vineland N.J.  that while he doesn’t think the economy is now in need of further Fed asset purchases, he would support such a move if a clear risk of deflation emerges.

The conditions Plosser set out for any eventual asset buying give a flavor of the debate at the Fed as it considers how to proceed with a renewal of quantitative easing, as the process of pushing additional reserves into the financial system by purchasing securities is called.

Plosser, a former economics professor and business school dean, is among the most inflation-focused hawks among Fed policy makers, and in spite of his views, most analysts believe critical mass has built at the Fed in favor of taking further steps to support the weak recovery.

If the Fed does decide to ease, it should be clear about why it is doing so and what it hopes to achieve, Plosser said.

 “The primary motivation for me to engage in additional asset purchases is if I was really afraid that deflationary expectations were coming,” he said.  

“I don’t think they are, and so I’m not of a mind that we need to do that. However, if that were to happen, and obviously things can change – that’s not my current program — then I think we need to engage in a communications strategy that says our objective is to raise inflationary expectations and to make sure we don’t have deflation,” he said.

“We need to be very explicit about that, we need to communicate that very directly. Because otherwise, I’m concerned that whatever we did, whether it was gradual or big, wouldn’t be effective. So if it’s really about managing expectations of deflation, then we need to be clear that’s what our objective is.”

Photo credit: Reuters/David W Cerny (Plosser gives speech in Prague March 23)

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