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Dissident Fed member forecasts a ‘painfully protracted recovery’

Friday, September 30th 2011 - 01:32 UTC
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Philadelphia Federal Reserve Bank President Charles Plosser dismissed “Operation Twist” Philadelphia Federal Reserve Bank President Charles Plosser dismissed “Operation Twist”

Federal Reserve's move last week to further lower borrowing costs was risky and won't significantly speed up a “painfully protracted” recovery, one of the officials who dissented against the decision said on Thursday.

Philadelphia Federal Reserve Bank President Charles Plosser said he was sceptical the central bank's so-called “Operation Twist” will prompt businesses to hire or consumers to spend given a backdrop of continued structural adjustments in the economy and fiscal uncertainty.

“We should not take certain actions simply because we can” Plosser, one of the central Fed’s most vocal inflation hawks told a forum of business leaders in Radnor, Pennsylvania. “The ills we currently face are not readily resolved through ever more accommodative monetary policy.”

The Fed said last week it plans to buy 400 billion dollars of longer-term Treasuries and sell the same amount of shorter-term Treasuries by the end of June 2012, in an effort to lower longer-term borrowing costs.

It also said it would support the mortgage market by reinvesting principal payments from its mortgage-related debt into mortgage-backed securities.

Plosser warned the Fed's extraordinarily easy policies could lead to high inflation down the road, even with unemployment still high.

“Creating an environment of stagflation, reminiscent of the 1970s, will not help businesses, the unemployed or the consumer. It is an outcome we must carefully guard against,” he said.

The Philadelphia Fed chief said he also objects to the Fed's pledge to keep interest rates low for two years, as according to his forecast they will need to be raised earlier.

That said, there would be scenarios in which he would support further easing: if the European sovereign debt crisis led to a major financial market disruptions or if deflation became a real threat.

“I do not see either of these scenarios in my forecast, so I do not anticipate that further accommodative monetary policy actions will need to be taken,” he said.

Plosser is expecting US growth to be less than 2% this year and around 3% in 2012. He previously expected growth of between 3 and 3.5% in 2011. As to unemployment he was equally discouraging: the rate will hold steady this year before falling to around 8% to 8.5% by the end of 2012

Categories: Economy, United States.

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