Fed's Plosser Says Easy Money May Be Backfiring

Charles Plosser, President and CEO of the Federal Reserve Bank of Philadelphia
Scott Eelis | Bloomberg | Getty Images
Charles Plosser, President and CEO of the Federal Reserve Bank of Philadelphia

The Federal Reserve's aggressive policy accommodation may be frustrating Americans' efforts to restore their personal wealth and may actually slow a broader rebound in U.S. consumption, a top official at the U.S. central bank said Friday.

Philadelphia Fed President Charles Plosser, an outspoken critic of the bank's prolonged near-zero interest rate policies, outlined the ways those policies may be undercutting the very U.S. economic recovery they are meant to encourage.

"Efforts to drive real rates more negative or promises to keep rates low for a long time may have frustrated households' efforts to rebuild their balance sheets without stimulating aggregate demand or consumption," Plosser, who does not have a vote on Fed policy this year, told a meeting of the New Jersey Bankers Association.

Now more than three years after the recession ended, households will nonetheless take time to restore wealth to a comfortable level, Plosser added, "and attempts to increase economic 'stimulus' may not help speed up the process and may actually prolong it."

Among a minority of so-called hawks at the central bank, Plosser also largely repeated predictions for a pick-up in U.S. economic growth to about 3 percent this year and in 2014. He also expects unemployment to fall to near 7 percent by the end of 2013, from 7.8 percent last month.

The U.S. economy grew at a decent 2.7 percent annual rate in the third quarter, but growth is expected to have slowed in the final months of the year. Last month, Fed policymakers said they expected GDP growth of between 2.3 to 3.0 percent this year, and 3.0 to 3.5 percent in 2014.

At that same December meeting, the Fed ramped up asset purchases that are meant to spur growth and pledged to keep rates near zero until the unemployment rate drops to 6.5 percent, as long as inflation expectations don't climb above 2.5 percent.

Plosser characterized the pace of U.S. economic growth as "moderate," and predicted that fourth-quarter growth was likely near 2 percent.

U.S. retail sales have been sluggish, rising 0.3 percent in November after a drop of 0.3 percent the month before.

Turning to the U.S. fiscal situation, the policymaker said the lingering uncertainty over government spending and taxes is weighing on business hiring. The Fed is probably not helping on this front, either, Plosser said.

"Here, too, in my view, monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest until a significant amount of the uncertainty has been resolved," he said.

Facing the so-called "fiscal cliff," U.S. lawmakers on Jan. 1 struck a partial deal that avoids most of the planned tax rises but put off big decisions on spending cuts for two more months.