Fundamental Analysis, Fundamental Analysis Forex
September 27, 2012 @ 7:47 pm

Plosser Says QE3 Will Have Meager Benefits, Fed Prepared To Act If Euro Crisis Escalates

The President of the Federal Reserve Bank of Philadelphia expressed serious doubts on the effectiveness of QE3 yesterday. Plosser, who is not a voting member of the Fed this year, said that economic research indicates additional asset purchases “are unlikely to reduce long-term interest rates by a significant amount” and added that “lowering rates by a few more basis points won’t spur growth and hiring”.

Plosser also said that the claims made by the FOMC that its action will have a substantive effect on unemployment risk undermining the Fed’s credibility. “The Fed’s hard-won credibility is crucial because if the public doesn’t have confidence in policy makers, their ability to set effective monetary policy will be harmed, hurting households and businesses” Plosser added.

He went on to say that he opposed the FOMC’s action because: “Every monetary policy action has costs and benefits, and my assessment is that the potential costs and risks associated with these actions outweigh the potential meager benefits”.

Plosser is worried about the size of the Central Bank’s balance sheet and added that the actions taken grew the balance sheet bigger and thus increase the risks for the future. He said that the Fed may be forced to sell its assets on the open market when its needs to reduce the “stimulus” provided to the economy.

He also doubts the notion that central banks can target unemployment like they do with inflation, because that is dependent on a lot more factors unrelated to monetary policy like taxes, technology and education. Plosser will have a vote on policy in 2014.

Plosser joins Richmond Fed President Lacker in his skepticism on the effectiveness on QE3. Lacker on September 15 said that QE3 probably wont do much for unemployment but that it will have a greater effect on inflation. Lacker is a voting member on the FOMC this year.

Another non-voting member, Fisher, didn’t support QE3, saying he did not see an argument for letting inflation rise to levels where it might scare the markets, adding that QE3 has led to increased in inflation expectations without more job creation.

In today’s interview on “Bloomberg Surveillance” Plosser repeated much of the above comments, “The risks and the costs might be very much higher than whatever small benefits we get” he said and added that “If it doesn’t work, we risk the credibility of the institution.”

Plosser also said that policy makers are following Europe’s Crisis and stand ready to act if the situation escalates. “The Fed is watching Europe very carefully and the consequences of that, how that will play out if Europe suffers a financial crisis for some reason.”

Related Posts Plugin for WordPress, Blogger...
, , , , , , , , ,

About Fx_Livermore

Fx_Livermore has over seven years experience in forex trading. He uses a mix of technical and fundamental analysis in his trading. His posts should not be taken as trading advice/recommendation to buy/sell any currency/security.

View all posts by Fx_Livermore

No comments yet.

Leave a Reply

You must be logged in to post a comment.