Fed official: Monetary policy can’t fix labor markets

Lately, there's been talk that the new voting composition of the Federal Reserve this year may mean an increased focus on controlling inflation, at the cost of fighting unemployment. Today we got a major new piece of evidence in support of that notion.

In a speech in Santiago, Chile, Philadelphia Federal Reserve Bank President Charles Plosser (pictured) warned that aggressive use of monetary policy to help fix the economy may be counterproductive. In doing so, Plosser appeared to set himself in opposition to the direction of Fed policy under Chairman Ben Bernanke.

"Monetary policy is not going to be able to speed up the adjustments in labor markets or prevent asset bubbles, and attempts to do so may create more instability, not less," said Plosser, who this year rotates into a voting position on the Fed panel that sets monetary policy.

Speeding up "the adjustments in labor markets" refers essentially to fighting unemployment. The Fed's $600 billion asset-purchase program, announced in November, is an effort to jolt the economy and thereby cut unemployment, currently at 9.4 percent. Critics, especially those on the right, have said the program could cause a spike in inflation. And although prices remain low, Plosser, an inflation hawk, echoed those concerns today.

"If economic growth in the United States continues to gain traction and the prospects begin to look ever better, it might be time for us to begin thinking about how do we begin to gradually take our foot off the accelerator," he told reporters.

"I do know that there is a danger that we wait too long, and the consequences of that might be disruptive and dangerous," he added.

Plosser's apparent desire that the Fed pay more attention to inflation and less to joblessness appears to jibe with the view of some Republican lawmakers. Rep. Mike Pence of Indiana and Sen. Bob Corker of Tennessee have said they plan to introduce legislation that would change the Fed's mandate, so it focuses exclusively on price stability, and no longer aims to boost employment.

Plosser also said in today's speech that through its participation in the bailout of the financial sector, the Fed had "crossed the Rubicon" into fiscal policy better left to Congress. He said this had increased the chances that the central bank will again be pressured to "use its powers as a substitute for other fiscal decisions." That, he said, "is a dangerous precedent, and we should seek means to prevent such future actions."

What might all this mean for the economy? In sum, Plosser's comments underline the likelihood that the Fed won't undertake additional efforts, beyond the asset-purchase program, to stimulate the economy in 2011 -- even if growth remains slow and unemployment high, as the Fed has predicted it will. It seems more likely, in fact, that the Fed will try to cool things down, either by cutting the asset-buying program off early, or by raising interest rates.

That would leave fiscal policy -- the province of Congress -- as the only potential source of stimulus. But with Republicans now controlling the House, stimulus spending looks unlikely. Indeed, the GOP, citing concerns over the deficit, has said it plans far-reaching spending cuts.

(AP Photo/Bradley C Bower)