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Plosser becomes second Fed official to want to pare asset buys

Federal Reserve Bank of Philadelphia President and Chief Executive Charles Plosser arrives at the opening reception and dinner for the Feder
Federal Reserve Bank of Philadelphia President and Chief Executive Charles Plosser arrives at the opening reception and dinner for the Feder

By Jonathan Spicer

LANCASTER, Pennsylvania (Reuters) - A second Federal Reserve policymaker is calling on the U.S. central bank to have some patience and begin tapering the amount of bonds it is buying, instead of ramping up stimulus with each month.

Philadelphia Fed President Charles Plosser said on Wednesday the benefits of the so-called quantitative easing program, which snaps up $85 billion in assets per month to promote investment and economic growth, are "meager" and outweighed by the potential costs of such aggressive policy easing.

The comments echo those last week of Richard Fisher of the Dallas Fed, a fellow inflation hawk at the central bank, and could up the ante as the Fed's 19 policymakers debate the effectiveness of the asset purchases at a meeting March 19-20. The vast majority of U.S. monetary policymakers back the program.

"I would like the FOMC to begin to taper these purchases with an aim toward ending them before the end of the year," Plosser told an economic development conference in this small southern Pennsylvania city.

"We are trying to be easier and easier and easier," he later told reporters. "I think we need to just stop and have some patience."

Plosser did not specify how much of a decrease he would like to see in the monthly buying. But he has always stood against the program, he noted, so the sooner the tapering begins the better.

Plosser, who does not have a vote this year on the Fed's policy-setting Federal Open Market Committee (FOMC), said his stance is based on the expectation that U.S. economic growth would pick up enough to lower the unemployment rate by almost a full percentage point by year end.

The central bank has kept interest rates at rock bottom for more than four years and is currently buying Treasury and mortgage bonds in an effort to keep longer-term borrowing costs low enough to spur spending and hiring.

Frustrated with the slow and erratic U.S. economic recovery and an unemployment rate that is still high at 7.9 percent, Chairman Ben Bernanke and most Fed policymakers endorse the program, which known as QE3 because it is the third such easing effort by the Fed since the 2007-2009 recession.

With higher taxes and lower government spending set for 2013, the central bank does not want to see the mid-year economic slump that hurt U.S. growth the last few years.

LOOMING RISKS

Plosser, however, listed several familiar risks posed by QE3 including financial stability, market functioning and price stability. He also noted a longer-term threat to the central bank's independence if the Fed starts taking big losses on the bonds, which have swelled the central bank's balance sheet to more than $3 trillion.

The Fed returns profits to the U.S. Treasury each year and it has never missed a payment before. Last year, remittances hit a record $89 billion, and the Congressional Budget Office estimates the Fed will contribute some $95 billion a year to federal coffers through 2016.

But remittances are expected to hit zero from 2018 through 2020 due to higher rates and the possibility the central bank would sell off some assets, before remittances resume in 2021.

"Would such a situation spur renewed calls to reduce the Fed's independence to set monetary policy?" Plosser asked. The outcome, he said, could hurt the central bank's independence from political interference in the longer term.

"The public and central bankers should scale back their expectations of the role and power of monetary policy," Plosser added.

Last week, Fisher said he would like the Fed to immediately taper the purchases because of the related risks and the fact that the housing market is on a sounder footing.

Other internal critics of QE3, such as Kansas City Fed President Esther George, who dissented on the policy decision in January, have warned about the troubles it could bring but have stopped short of calling for an immediate paring of purchases.

Plosser, who like many at the Fed have been overly optimistic on the economy in past years, repeated he expects U.S. economic growth to rise to about 3 percent in 2013 and 2014, with inflation close to the Fed's 2-percent goal. He expects a drop in the unemployment rate to near 7 percent by the end of this year.

But he said the ongoing uncertainty over the U.S. budget, including the spending cuts that took effect last week and the need to fund the government beyond this month, "will likely be a drag on near-term growth.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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