The world's central banks should not have unfettered ability to purchase assets because that violates the traditional separation of monetary and fiscal policy-making and can allow governments to inflate away debts, a top U.S. Federal Reserve official said on Monday.
Instead, the Fed and other central banks should have clear limits on how much and in what way they can expand balance sheets, so as to avoid problems associated with the unprecedented policies adopted in the wake of the global financial crisis and recession, Philadelphia Fed President Charles Plosser said in prepared remarks.
The U.S. central bank has nearly $3 trillion in mostly long-term Treasurys and other securities on its balance sheet after two rounds of so-called quantitative easing since 2009. The European Central Bank's balance sheet has swelled even larger, to more than 3 trillion euros ($3.98 trillion), as it also took steps to revive the euro zone economy.
"Granting vast amounts of discretion to our central banks in the expectation that they can cure our economic ills or substitute for our lack of fiscal discipline is a dangerous road to follow," Plosser told a conference at the French central bank.
"Clear boundaries and resisting the use of the balance sheet as a new policy tool would also improve fiscal discipline by making it more difficult for the fiscal authorities to resort to the printing press as a solution to unsustainable budget policies," he said.
Plosser, an outspoken policy hawk who opposed the Fed's last round of bond-buying, has said repeatedly that the central bank should do no more to stimulate the U.S. economy, which has shown signs of strength in the last few months. Still, Chairman Ben Bernanke and other Fed policymakers have left the door open to another round of large-scale asset purchases if needed.
The Bank of England and others have recently ramped up such purchases, which are meant to drive longer-term interest rates lower, spurring investment and spending. Critics, however, worry that central banks will have difficulty offloading the securities when the time comes to tighten policy.
Plosser said there was no question central banks could unwind unconventional measures they have adopted and that the issue was more about choosing the right time and pace in order to remain true to price stability and follow their mandates.
"That is not a new problem, that has always been a problem for central banks at the end of the day," Plosser told journalists on the sidelines of the conference.
"But this one is going to be particularly challenging because we have such a huge balance sheet and the task of unwinding is going to be much more complicated and much more difficult," he added.
Plosser, who does not have a vote this year on the Fed's policy-setting committee, also criticized the Fed's purchases of mortgage-backed securities as blurring the lines between the U.S. government's fiscal policy and the Fed's monetary policy.
The committee's statement in January that it wanted to return to an environment in which interest rates are the primary tool was a good first step in returning to more normal policymaking, Plosser said.
"I interpret this as saying that our balance sheet should not be viewed as a new independent instrument of monetary policy in normal times," he said in his prepared remarks.
Plosser said he was less worried about inflation risks building up this year than in the coming years and he forecast U.S. growth of about 3.0 percent in 2012 and 2013.
He also said that he was expecting the U.S. unemployment rate to fall to about 7.8 percent this year and close to 7.0 percent in 2013 from 8.3 percent in February.
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