One of the men who runs the Federal Reserve System is worried about the potential effects of the central bank’s own policies, which involves printing more money.
Philadelphia Federal Reserve President Charles Plosser also acknowledged that he and his colleagues don’t understand all the policies’ effects.
“Well I am very worried about the potential for unintended consequences of all this action,” Plosser said on CNBC’s Squakbox program. The action Plosser was referring to is quantitative easing, the Federal Reserve’s attempt to simulate the economy by buying $65 billion worth of bonds each month.
Some observers believe QE is what is driving the stock market to new highs. There also are those who think a stock market crash and an economic downturn will result when QE ends.
Plosser thinks that the economy is recovering but that the effects of quantitative easing could threaten that recovery. Quantitative easing is supposed to stimulate the economy by keeping interest rates low. Keeping interest rates low encourages lending and economic activity. Critics have called it printing money and easy money.
No Plan B Could Lead To Rough Landing
The Federal Reserve Board doesn’t know what will happen when Quantitative Easing ends, Plosser said, and the fed has no plan to deal with the effects of that action.
“It’s very difficult for us to know because we’ve never been there before, we’ve never done this before,” Plosser said of QE. “Our exit from this massive amount of asset purchases is going to be very challenging. We don’t know whether it’s going to go smoothly. If we’re lucky everything will go smoothly, everything will coast and everything will be gradual, it will be wonderful.”
“Sometimes if you don’t have plan B you don’t have a plan,” Plosser said.
Possible Unintended Consequences
One possible unintended consequence of the end of QE would be higher rates of inflation. Another could be higher interest rates which could slow the economy by making it more expensive to borrow money. Plosser believes interest rates will rise at some point.
“I’m worried that we’re going to be too late,” Plosser told reporters about an interest rate change at a University of Delaware speech last month. That could indicate he thinks rates may have to be raised to keep the economy from overheating.
The Fed has reduced its buying of mortgage bonds from $85 billion a month to $65 billion a month. That might be an attempt to slow the economy and prevent inflation.
Central Banks Not The Answer
Plosser also said that the Federal Reserve does not have the level of control over the economy people think it does. He believes the Federal Reserve, and central banks in other countries, have too much power and that power should be curtailed.
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“Expectations of what central banks can do and should do have risen I think to unhealthy highs. I would like to see over time central banks gradually pull themselves into the background. We are not the panacea. We are not the silver bullet for all the economic challenges that the world faces.”
Economy Won’t Return to Pre-2008 Levels
The economy will recover but the boom times seen before 2008 will not return, Plosser predicted. Instead, steady economic growth will be limited for the foreseeable future.
“It will be many, many years before we get back to there,” Plosser said of the kind of economic growth seen before 2008.