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TRANSCRIPT: Philadelphia Fed President Charles Plosser on Bloomberg TV

March 26, 2012 | About:
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BLOOMBERG TV EXCLUSIVE: Bloomberg Television's economics editor Michael McKee spoke to Federal Reserve Bank of Philadelphia President Charles Plosser from the Banque de France in Paris. Plosser said that he sees no need for more stimulus as the U.S. economy recovers, and he has “cautious optimism” for economic improvement.



On whether the central banks have gone too far and may cause unintended consequences in the future:

"Those are difficult questions but important questions for us to try to grapple with. Policy is never free. There are always consequences. Sometimes there are unintended consequences and sometimes there are consequences that can be predictable. I think it's important we look over time and make judgment on policy based on not just what seems appropriate today, but to put that policy in the context of how policies will have to be conducted in the future. And that's pretty hard to do sometimes."

On whether the Fed may have strayed over the line from monetary policy into fiscal policy:

"Certainly in the financial crisis and in the global recession, there's been a great pressure on policymakers both on the fiscal side and on the monetary side. We all are doing the things we think are best for the economy as a whole, but it's a different kind of time. I think we have to be careful that the consequence of our actions don't create too many problems for us down the road."

On whether the Fed has given a lot of ammunition to critics like Ron Paul:

"I've been critical a bit in the past about what I've described as our large balance sheet and in particular that we've strayed in areas of what some call credit allocation, where we're actually allocating credit across sectors of the economy whether it be the housing market or other sectors of the economy."

"There's a lot of debate about that inside the Fed and outside the Fed. It’s a form of fiscal policy. And when the Fed engages in things that look like fiscal policy, we get criticized. We can say it was what we had to do at the time and it was appropriate, but we have to recognize that it is straying into the territory that traditionally monetary policy has not been."

On whether the Fed could unwind itself from fiscal policy:

“I think we can unwind it. It will take a degree of fortitude and perseverance, but I think we can unwind it. And I think the Fed will. In June of this year, the Fed released as part of its statement a set of principles about what we'll call the exit strategy, about where we wanted to be. It said two basic things, one is we wanted to get back to having the federal funds rate our primary policy instrument. That's going to require us to shrink our balance sheet for us do that."

"The other thing is, we had a desire to return our system open market account to a treasuries portfolio. Both of those were statements of principles by the FOMC. I think those are important principles to establish. Exactly the timing of how we do that remains to be seen, but those are important principles to establish and I think are consistent with my views about restoring this balance between monetary and fiscal policy."

On whether he is in favor of extending, ending or increasing Operation Twist:

"It’s too soon to tell. Our policy ought to be always dependent on what the economy looks like. I don't know where the economy will be in June. I have my own forecast. I think the economy is doing better. We're gaining traction, I think. We're not entirely out of the woods. We saw last year that bad things can happen, unexpected events can throw the economy off track. But I have a cautious optimism. I think if the economy evolves as I think it will, barring some extraordinary events, I don't think there will be any need for further accommodation or further quantitative easing, but that remains to be seen, depending on how the economy evolves."

On whether the rise in long-term interest rates concerns him:

"I think the presumption that all movements in rates have to do with what monetary policy is doing or people think it's going to do is a little bit overblown. The markets sometimes try to attribute too much power to the Fed. I am fond of the expression that when things go really well, the Fed gets too much credit and when things go poorly, they get to too much blame. There's been a lot going on in the Treasury markets. The crisis in Europe has affected rates and drove them lower in the summer and fall because of concerns about what was going on in Europe. I think there was a flight to safety in Treasuries. That had a big impact on the rates, over and above I suspect whatever Operation Twist or excuse me, the charity extension program, was meant to accomplish. I think disentangling all these effects is really difficult."

On whether the Fed should keep a QE in place to offset the potential difficulties at the end of this year, with the end of tax cuts and the end of stimulus:

"That's a very difficult question. That will depend on the state of the economy. I don't think it's necessarily the correct way for us to think about doing more accommodation just because of what the fiscal authorities are doing. The Chairman's has made it very clear that this issue of the fiscal cliff - what we really need to be thinking is in terms of the future path of fiscal policy and can we commit to be more fiscally disciplined in the way we do budgeting and the way we plan our expenditures? It's not so much about today as it is about the future path, and we need to keep focused on that. And that's where Congress should be focused I think."

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