Plosser on His Fed "Exit" Plan
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Comments from Philadelphia Federal Reserve President and FOMC voting member Charles Plosser discussing the Fed's exit plan sent markets into a tizzy mid-day.
The dollar rallied and gold and oil sold off on the headlines.
In a speech appropriately entitled "Exit" Plosser said if the economy continues to pick up as expected then "monetary policy will have to reverse course in the not-too-distant future." Not reserving course in a timely manner could have serious consequences, he warns.
On an exit plan, Plosser said his proposed strategy involves "raising rates and shrinking the balance sheet concurrently and tying the pace of asset sales to the pace and size of interest rate increases."
As a first element, Plosser said the Fed should move away from the zero bound and stop the reinvesting program and allow securities to run off as they mature.
"We would raise the interest paid on reserves from 25 basis points to 50 basis points and seek to achieve a funds rate of 50 basis points rather than the current range of 0 to 25 basis points." With this, the Fed also announced that between each FOMC meeting it would sell an additional specified amount of assets.
The second element of the Mr. Plosser plan would be each subsequent meeting the FOMC will, as usual, evaluate incoming data to determine if the interest rate on reserves and the funds rate should rise or not. This he said would be conditional on the state of the economy and economic outlook.
"If the funds rate and interest on excess reserves do not change, the balance sheet would continue to shrink slowly due to run-off and the continuous sales. On the other hand, if the FOMC decides to raise rates by 25 basis points, it would automatically trigger additional asset sales of a specified amount during the inter-meeting period."
Lastly Plosser said the plan must address the composition of the Fed's portfolio. "If we are to return to an all-Treasuries portfolio, then asset sales, particularly in the early part of the program, must be concentrated in MBS."
After exiting, the Fed should re-establish the federal funds rate as its primary instrument and shrink its balance sheet from $1.4 trillion to $1.5 trillion to about $50 billion, Plosser added. The Fed's portfolio should consist predominantly of U.S. Treasury securities concentrated in short-term issues. He also said a preferred operating environment would make explicit the Fed's commitment to a numerical inflation objective.
The dollar rallied and gold and oil sold off on the headlines.
In a speech appropriately entitled "Exit" Plosser said if the economy continues to pick up as expected then "monetary policy will have to reverse course in the not-too-distant future." Not reserving course in a timely manner could have serious consequences, he warns.
On an exit plan, Plosser said his proposed strategy involves "raising rates and shrinking the balance sheet concurrently and tying the pace of asset sales to the pace and size of interest rate increases."
As a first element, Plosser said the Fed should move away from the zero bound and stop the reinvesting program and allow securities to run off as they mature.
"We would raise the interest paid on reserves from 25 basis points to 50 basis points and seek to achieve a funds rate of 50 basis points rather than the current range of 0 to 25 basis points." With this, the Fed also announced that between each FOMC meeting it would sell an additional specified amount of assets.
The second element of the Mr. Plosser plan would be each subsequent meeting the FOMC will, as usual, evaluate incoming data to determine if the interest rate on reserves and the funds rate should rise or not. This he said would be conditional on the state of the economy and economic outlook.
"If the funds rate and interest on excess reserves do not change, the balance sheet would continue to shrink slowly due to run-off and the continuous sales. On the other hand, if the FOMC decides to raise rates by 25 basis points, it would automatically trigger additional asset sales of a specified amount during the inter-meeting period."
Lastly Plosser said the plan must address the composition of the Fed's portfolio. "If we are to return to an all-Treasuries portfolio, then asset sales, particularly in the early part of the program, must be concentrated in MBS."
After exiting, the Fed should re-establish the federal funds rate as its primary instrument and shrink its balance sheet from $1.4 trillion to $1.5 trillion to about $50 billion, Plosser added. The Fed's portfolio should consist predominantly of U.S. Treasury securities concentrated in short-term issues. He also said a preferred operating environment would make explicit the Fed's commitment to a numerical inflation objective.
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