Rate cuts are no cure-all, Plosser warns
The federal funds rate is low enough to boost economic growth as the lagged impact of previous interest rate cuts starts to kick in, Philadelphia Federal Reserve President Charles Plosser said on Friday.
Plosser, speaking at Drexel University in Philadelphia, warned against seeing rate cuts as “the solution to most, if not all, economic ills.”
The real fed funds rate, or the actual rate minus the expected rate of inflation, is negative for the first time since 2003-2004, Plosser said.
That “accommodative” level “should support the market forces that will bring economic growth back toward its long-term trend,” he said.
Despite his cautiously upbeat outlook, Plosser said that forecasting economic growth is harder given current turbulence, and that the credit crunch “has the potential to restrain economic growth going forward.”
Although some argue for lower rates as “insurance” in case financial turmoil impedes the transmission of rate cuts to the economy, “determining the appropriate level of such extra accommodation is difficult to quantify,” he said creditreports.
Plosser voted against the Federal Open Market Committee’s decision in March to lower the federal funds rate by 75 basis points.
Seeing rate cuts as a cure-all is “a dangerous misconception,” he said, adding that that assessment of what monetary policy can achieve “seems to have risen considerably over the years.”