Charles Plosser discusses monetary policy issues on a panel with former Bundesbank Pres. Axel Weber and Christain Noyer, governor of the Banque de France, at the Banque de France in Paris, taking questions from the audience and also from the media.
Fed officials made counter points today. And that is how the Fed operates - open debate on monetary policy is expected. While Fed Chairman Ben Bernanke was commenting on improvement in the labor mark being insufficient and continued ease being needed, Philly Fed President Charles Plosser was arguing that the Fed needs to be very careful about when to use its balance sheet for monetary policy. Plosser stated that central banks have crossed the line between monetary policy and fiscal policy, resulting in increased moral hazard in the financial system. The bottom line from his comments is that there are lower odds for additional quantitative easing ahead.
"Unfortunately, over the past few years, the combination of a financial crisis and sustained fiscal imbalances has led to a breakdown in the institutional framework and the previously accepted barriers between monetary and fiscal policies. The pressure has come from both sides. Governments are pushing central banks to exceed their monetary boundaries, and central banks are stepping into areas not previously viewed as appropriate for an independent central bank."
"Let me offer a couple of examples to illustrate these pressures. First, despite the well-known benefits of price stability, there are calls in many countries to abandon this commitment and create higher inflation to devalue outstanding nominal government and private debt. That is, some suggest that we should attempt to use inflation to solve the debt overhang problem. Such policies are intended to redistribute losses on nominal debt from the borrowers to the lenders. Using inflation as a backdoor to such fiscal choices is bad policy, in my view."
"The Fed and other central banks have undertaken other actions that have blurred the distinction between monetary policy and fiscal policy, such as adopting credit policies that favor some industries or asset classes relative to others. Such steps were taken with the sincere belief that they were absolutely necessary to address the challenges posed by the financial crisis."
"The clearest examples can be seen when the Federal Reserve established credit facilities to support markets for commercial paper and asset-backed securities. Most notable has been the effort by the Fed to support the housing market through its purchases of mortgage-backed securities. These credit allocations have not only breached the traditional boundaries between fiscal and monetary policy, they have generated pointed public criticisms of the Fed."
"Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions. Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline. This pressure can threaten the central bank's independence in conducting monetary policy and thereby undermine monetary policy's effectiveness in achieving its mandate."