NEW YORK — The Federal Reserve went down a dangerous road when it expanded its balance sheet with more than just Treasury securities in a bid to provide stimulus to the economy, a key central banker said.
"The balance sheet of the Federal Reserve has changed from one made up almost entirely of short-term U.S. Treasury securities to one that is mostly long-term Treasurys, plus significant quantities of long-term mortgage-backed securities," Federal Reserve Bank of Philadelphia President Charles Plosser said.
"This concentration of housing-related securities is problematic because it is a form of credit allocation and thus violates the monetary [and] fiscal policy boundaries" that should guide the proper conduct of Fed policy, he said.
When the Fed provides stimulus in the way it has over the course of the financial crisis and the recovery, it degrades the public's perception that the central bank is a neutral player in the economy, Plosser said. "When markets or governments come to believe that a central bank can freely expand its balance sheet without directly impacting the stance of monetary policy, I believe that various political and private interests will come forward with a long list of good causes, or rescues, for which such funds could or should be used," he said.
Plosser is not a voting member of the monetary policy-setting Federal Open Market Committee this year. His comments came from the text of a speech prepared for delivery Monday before an event held at the Banque de France in Paris.
In his prepared remarks, Plosser mostly reiterated points made in earlier public remarks, and he refrained from comment on the current and future state of the economy and monetary policy.
Plosser has been a consistent skeptic of the actions taken by the Fed in recent months, and he spoke as markets have looked at the recent influx of good economic data and concluded it is increasingly unlikely the Fed will provide additional stimulus to the economy beyond what is already planned.
Much of the central banker's prepared remarks were aimed at making sure central banks don't engage in actions more appropriate to the elected officials. Plosser fears that things the Fed and other central banks have done over the course of recent years have blurred that boundary in unhelpful ways. "It is simply good governance and wise economic policy to maintain a healthy separation between those responsible for tax and spending policy, and those responsible for money creation," Plosser said.
"The combination of a financial crisis and sustained fiscal imbalances has led to a breakdown in the institutional framework and the previously accepted barriers between monetary and fiscal policies," he warned. "Governments are pushing central banks to exceed their monetary boundaries, and central banks are stepping into areas not previously viewed as appropriate for an independent central bank."
As he has numerous times in the past, Plosser said inflation is not the answer to what ails economies right now. "History also teaches us that resorting to the printing press in lieu of making tough fiscal choices is a recipe for creating substantial inflation and, in some cases, hyperinflation," he said. "Using inflation as a backdoor to such fiscal choices is bad policy, in my view."
