There is nothing automatic about the Federal Reserve raising the federal funds rate six months after the conclusion of its large-scale asset purchases, Philadelphia Federal Reserve Bank President Charles Plosser said Tuesday night.
Plosser also expressed considerable skepticism about cutting the rate of interest the Fed pays on excess reserves, as he answered questions from the Money Marketeers of New York University.
Plosser, a voting member of the Fed’s policymaking Federal Open Market Committee, was asked to elaborate on Fed Chair Janet Yellen’s comment after last Wednesday’s FOMC meeting that the FOMC might begin raising the funds rate “around six months” after it finishes its third round of asset purchases “this Fall.”
Downplaying Yellen’s statement and expressing surprise at the market’s reaction to it, Plosser said that, “even though (Yellen) mentioned six months,” she added that “it will depend on how the economy is doing.”
“The issue is really about the state of the economy,” he added.
Plosser expressed considerable skepticism about cutting the IOER to provide additional monetary stimulus.
He said it is technically possible for the Fed to cut the IOER to zero, but said many think “it is not going to make that much difference.”
Although banks now nominally earn 25 basis points on their reserves, Plosser said most are “really only getting paid 15 basis points” if they are FDIC-insured.
“It wouldn’t make that much difference,” Plosser said, adding that cutting the IOER to zero or even making it negative, could “damage the plumbing of interbank lending.”
“I’m not going to say it’s impossible,” he said, but “I worry about the mechanics” and “I question to what degree it would be effective.”
Plosser was also agnostic on the subject of using reverse repurchase agreements as a major instrument of monetary policy when it comes time to tighten policy, saying that while it is a tool that could help the Fed manage short-term interest rates “it’s not clear it’s necessary.”
And he emphasized, “the FOMC has not decided whether the reverse repo is an appropriate instrument for monetary policy.”
He added that the FOMC is “a ways away from making that decision.” And he said, “we shouldn’t let markets get too far ahead” on that.