Fed balance sheet poses ‘huge risks’ for inflation: Charles Plosser
President Trump’s nominee to replace Federal Reserve Chair Janet Yellen, Jerome Powell, will face the Senate Banking Committee during his confirmation hearing on Tuesday. Ahead of that, former Federal Reserve Bank of Philadelphia President Charles Plosser told FOX Business that the Fed needs to be more transparent with their plans to unwind their $4.5 trillion balance sheet.
Plosser, who served as a member of the Federal Open Market Committee (FOMC) during the Great Recession said one of the challenges the Fed will face is how much excess reserve they plan to keep on the balance sheet.
“It is a big deal and it’s very risky from my point of view,” Plosser told Maria Bartiromo on "Mornings with Maria." “They puzzle about inflation but they refuse to look at quantities and deal with the fact that the balance sheet poses huge risks for inflation. Can they really be confident that all that excess reserves in the banking system turns into money and starts creating inflation? How confident are they that they can actually reign it in through their current balance sheet activities and through interest on reserves? I think there are a lot of questions looming out there.”
Even so, Plosser is more concerned about the Fed’s ability to respond to risks created by carrying a very large balance sheet, rather than inflation in the near term.
“I think there are a lot of questions about inflation that we don’t fully understand and so I think they have to be very careful. The Fed talks about risks but they rarely talk about the risks that they’ve created with their balance sheet and with their actions,” he said.
Janet Yellen is set to testify before the congressional Joint Economic Committee on the state economy on Wednesday. Meanwhile, economists from Goldman Sachs and Barclays expect 4% global growth next year -- the strongest since 2011—because of synchronized growth around the world. While Plosser was also bullish, in his opinion, “the fretting over low inflation is overdone.”
“It’s pretty hard to argue, certainly in the United States, about whether or not the Fed has implicitly achieved or we’re near whatever goals we might have. Inflation is low, there’s nothing really wrong with that, and unemployment rates are relatively low and most people say we are near full employment,” he said.
Plosser added that the Trump Administration’s plan to cut tax rates to 20% will move the needle on economic growth in the U.S.