Charles Plosser, CEO and president of the Federal Reserve Bank of Philadelphia, says additional economic stimulus is dangerous and akin to speeding down the highway to reach a party only to find you’ve missed the exit.
Plosser expects to see stabilization on the housing front eventually, but not much improvement in 2012. The Philadelphia Fed chief made those assertions in a prepared speech for the University of Delaware Center for Economic Education and Entrepreneurship.
Further, Plosser doesn’t expect housing levels to ever regain their pre-recession levels.
“We entered the Great Recession over-invested in residential real estate, and we are not likely to see a housing recovery until the surplus inventory of foreclosed and distressed properties declines.”
Plosser also warned about what he calls accelerationist economic policy.
He reiterated his stance that the Fed no longer needs to deploy further economic stimulus. He points out, to date, the Fed has kept interest rates near zero, while buying mortgage securities and other debt, expanding its balance sheet.
“Today, we are in a modest recovery from a deep recession and financial crisis,” Plosser said. “The financial crisis has passed, however, and monetary policy should not continue to act as if the crisis was still with us.”
Plosser also said outlining plans to keep interest rates low through 2014 presents the economy with new risks.
“I do not support the practice of offering forward policy guidance by saying economic conditions are likely to lead to low rates through some calendar date,” said Plosser. “Such statements are, in my mind, particularly problematic from a communications perspective. Monetary policy should be contingent on the economic environment and not on the calendar.”
Plosser’s speeding car analogy relates to his belief that excessive monetary policy, which is focused on keeping rates low and pursuing additional stimulus, could create the negative outcome of higher inflation down the road and misallocation of resources in the marketplace.
He says, “Monetary policy is sometimes criticized for such go-stop policies. Policymakers step on the accelerator aggressively, only to slam on the brakes in order to change course. Such an approach to policy can be highly destabilizing, creating added volatility for financial markets and the economy.”
“I would add that constant acceleration only makes these risks even more hazardous. Slamming on the brakes or abruptly changing course could disrupt the economy.”
