The Fed Admits it's Dug itself into a Very Big Hole

By: Bloomberg

Charles Plosser, president of the Philadelphia Federal Reserve Bank, told Tom Keene and Sara Eisen on "Bloomberg Surveillance" today that "we've dug ourselves a very large hole" and that "when I've weighed the costs and benefits of this [quantitative easing] policy, I've decided that the costs outweigh the benefits."

Plosser also said that it is "disturbing" to him that "more and more is being expected of central banks." He said, "We are expected to solve all the world's problems. Our fiscal authorities are not doing a very good job in any country."

Plosser on what his confidence is that Bill Dudley and Janet Yellen will get the exit of quantitative easing right:

"Oh I think it's pretty clear we know and have the tools of what to do. The question is, will we be able to execute them and will the markets be patient enough with us to be able to do it in a smooth way?"

On whether the issue is market reaction or fear of an exogenous shock:

"Well either one of those things. Clearly shocks are always present and sometimes they're good shocks, sometimes they're bad shocks. But they're shocks and we can't always predict them."

On whether he still believes it's time to look at an exit sooner rather than later:

"Well I've never felt that our asset purchase have been that effective in addressing what seems to, what's the biggest problem we face in this country, which is the employment market and labor market. It's very, it has its impacts in the financial sector. We've seen a lot of restructuring of financial deals and debt restructuring and so forth. But its transition and transmission into the labor market has been much more dubious."

On whether he sees QE as potentially more risky than beneficial at this point:

"Well I've argued for some time now that I thought there are great risks with this policy. And that those risks are high. And when I've weighed the costs and benefits of this policy, I've decided that the costs outweigh the benefits."

On whether there's anything that has happened historically that the Fed can use as a guideline:

"We've already been breaking new ground in many ways. So no, there's not much historical evidence for us to go on or even academic theory for us to go on in this instance. Obviously there are episodes in Japan and other places where they've tried sort of Quantitative Easing but not on the scale that we've been doing it. And so it's, it's really uncharted territory."

On whether the Fed is buying time for the fiscal authorities not getting their job done in fighting the debt problem:

"I don't think of it that way. I think that's potentially a very dangerous way to think about the role of monetary policy."

On why we're not seeing the kind of traction we need in the labor market:

"I think that's really the big $64 trillion question if you will. It's very difficult. The labor market has changed in many ways. You've got demographic factors at work, you've got technology at work, you've got international trade at work. You've got a lot of things going on. And notice none of those things have anything to do with monetary policy."

On whether it's structural or cyclical:

"I don't like those two words. It is in transition I should say. And it's in a transition which is not going to go very quickly unfortunately. As much as we may like it to."

On countries around the world going the opposite way of the U.S. and stepping on the gas:

"I think for monetary policy, each country is going to be somewhat different, they have different pressures, they have different challenges, they have different shocks that hit them. So I don't think all countries have to do the same thing. What is disturbing to me and has been for a long time is that in many ways central banks, more and more is being expected of central banks. We are expected to solve all the world's problems. Our fiscal authorities are not doing a very good job in any country."

On whether he is overstretching:

"All central bankers around the world are. They're making up for the fact that their political systems are dysfunctional. When governments don't work, people are out of work, economies aren't growing, easy money turns out to be the easy thing to do. It's the one thing that governments can do because they can't simply do what they're expected to do. And it's dangerous. In a funny sort of way, and you're not going to like this, central banks around the world have become something of enablers of dysfunctional democratic systems. And the day of reckoning will come and all of you have got to think about it. And that's the great unwinding. It will happen here, it will happen around the world...It's easier to print money than it is to raise taxes or cut spending. And when that happens, we know that that usually ends in a not very pretty place. And I think that it's very dangerous for us to think that monetary policy is a solution."

On those who say record highs in the stock market are fueled by Fed liquidity and central bank liquidity around the world:

"Well, you know, different people have different takes on that. I think maybe some of it is. I don't think anybody knows the answer for true or for certain. But I do think there is a lot of evidence in the United States for example, people have pointed to the fact that profits are very high. P/E ratios and other metrics are not that far out of line. So I think it's a judgment call and people are going to have different judgments about that. But I don't think that to the extent that it is monetary policy, that's just another symbol of the kind of risks that lay out there for us."

On whether he worries about the Fed's credibility:

"Of course I do. If we continue to take actions that people, that we tell people and people think are going to solve our problems and they don't work, that risks our credibility."

On whether he worries about a spike in interest rates:

"I think we've dug ourselves a very large hole here. And I think the trick is going to be climbing our way out. And how that is going to play out when there are so many things that may be beyond our control. I'd like to stop. But I would particularly like to see us begin to slow the pace down, gradually ease ourselves out of this, if we possibly can."

bloomberg.com

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