Philly Fed President Pessimistic of Bond Buying Program

By TraderVox.com

Tradervox.com (Dublin) – Charles Plosser, the Federal Reserve Bank of Philadelphia President, has expressed pessimism in the ability of the bond buying program announce by the Fed to spur economic growth and employment in the country. In a speech yesterday in the district bank in Philadelphia, Plosser said that the program is unlikely to bring much benefit to economic growth or employment. He warned against conveying the message that the asset purchases program will bring substantive impact on labor market and speed up economic recovery as this puts at risk the credibility of Federal Reserve.

The Federal Open market Committee decided to embark of an asset purchases program where the bank will buy $40 billion of mortgage-backed securities per month until the labor market improves substantially. The unemployment rate has been above 8 percent since February 2009, prompting the Fed to shift to unconventional tools to deal with it. Plosser noted that economic research shows that additional asset purchases will not significantly reduce long-term interest rates and if interest rates is lowered by few basis points, the economic recovery pace will not be affected and neither will the hiring. He projected that the US economy will probably grow at rate of 3 percent in 2013 and 2014.

Explaining his opposition to the Fed decision, Plosser indicated that he believes that quantitative easing program is not appropriate for current economic environment. The US stocks dropped sending the S&P 500 index on its biggest loss in three months. Concerns that the current measures taken by global central banks will not yield the expected results have spurred global stock decline. Plosser said that protecting the hard won Fed credibility is important as the confidence in policy makers helps them to make effective monetary policies. He explained that if Americans believe the Fed will delay in raising interest rates, they may construe this as an indication the Fed is willing to tolerate higher inflation, which would spur higher inflation expectations that would force the Committee to act.

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