Philadelphia Federal Reserve’s Charles Plosser Raises Caution About QE2.
A Federal Reserve Bank President has raised concerns over the Feds $600 billion Treasury bond purchase program due to possible quicker than anticipated economic growth. Charles Plosser, president of the Federal Reserve Bank of Philadelphia who will become a voting member of the Federal Reserve this year has spoken about the Fed’s bond buy program and raised caution about the efficacy of the purchases in stimulating the economy if the growth occurs at a faster pace.
Plosser worries inflation could become a concern if the program isn’t gradually reduced. According to Plosser, inflation could become a problem if “we don’t begin to gradually reverse course.”
The next Fed meeting occurs Jan. 25-26 and Plosser predicts the economy could grow at up to 3 to 3.5 percent over the next few years.
Cause vs. Effect of QE2
Is growth occurring because of the Fed’s bond buying program or in spite of it? The increased sentiment that has occurred over the last few weeks may largely be in part due to the perceived Bernanke put on the markets. The next few weeks will establish whether sentiment was impacted more by the November elections.
Exerpt of Plosser’s Speech:
“The aggressiveness of our accommodative policy may soon backfire on us if we don’t begin to gradually reverse course. On the other hand, if serious risks of deflation or deflationary expectations emerge, then we would need to take that into account as we adjust our policy stance.
In conclusion, our nation’s economy is now emerging from the worst financial and economic crisis since the Great Depression. A slow but sustainable economic recovery is under way, and I expect annual growth to be in the 3 to 3½ percent range over the next two years.
As the economy continues to gain strength and optimism grows among businesses, hiring will increase. The unemployment rate, however, will decline to acceptable levels only gradually. The shocks and dislocations we experienced from the financial crisis were significant, and it will take some time for the imbalances in labor markets to be resolved.”