MacroScope

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

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.

Richard Fisher’s change of heart

Dallas Federal Reserve President Richard Fisher at first voted against the Fed’s Dec. 16 decision to aggressively chop benchmark interest rates to near zero, but reversed his decision during a lunch break shortly afterward, a book about the Fed slated for August publication reveals.

“I felt after going for a walk down the hall that I didn’t want to pull the legs out from under Ben, and I didn’t want to be perceived as not being a team player,” Fisher says in David Wessel’s “In Fed We Trust,” an inside look at the Fed’s reaction to the financial crisis that exploded in the summer of 2007.

The Fed’s policy-setting Federal Open Market Committee decided to cut rates by almost a full percentage point, an unusually large cut, to fight back hard against a darkening outlook for the economy, which was in desperate condition after the Lehman Brothers failure and the spreading contagion of soured credits.  Fisher, who had dissented four times that year (including once when he thought the Fed should raise rates to quell inflation worries), at first felt that another move down wouldn’t help the economy and would in fact hurt struggling banks’ profits and people who lived on interest from their savings, and voted against the rate cut before changing his mind.