Reply #12: Price stability should remain key: Fed's Plosser

[Ghost Dog]

CAPE TOWN (Reuters) - The best way for central banks to foster sustainable economic growth and prevent instability is to keep inflation under control, Philadelphia Federal Reserve President Charles Plosser said on Friday.

A broader role for monetary policy is risky, he added, because failure to deliver results could lead to a crisis of confidence in central banking.

"Price stability is not only a worthwhile objective in its own right. It is also the most effective way monetary policy can contribute to economic conditions that foster the Federal Reserve's other two objectives: maximum employment and moderate long-term interest rates," Plosser said in prepared remarks at South Africa's Global Interdependence Center.

...

Plosser dissented on the Fed's last policy vote earlier in March, voicing his worry that yet another 0.75 percentage point rate cut was perhaps excessive.

The Fed has also fully embraced the lender of last resort role, expanding the range of collateral it accepts on loans and broadened access to emergency funds at the discount window to a wider array of financial institutions.

Some analysts fear this could eventually boost inflation, especially if the value of securities held by the Fed plummets, thereby forcing the central bank to print money to bolster its own balance sheet.

Plosser seemed to share these concerns to some extent.

"There seems to be a view that monetary policy is the solution to most, if not all, economic ills," he argued.

"Not only is this not true, it is a dangerous misconception and runs the risk of setting up expectations that monetary policy can achieve objectives it cannot attain."

/... http://news.yahoo.com/s/nm/20080328/bs_nm/economy_fed_safrica_plosser_dc;_ylt=AlvW50JauQIZK42gCfP1gMi573QA