Economic Outlook and Monetary Policy

Andy Rosenberger, Brinker Capital

Recently, I had the pleasure of attending a speech by Charles Plosser, the President of the Federal Reserve Bank of Philadelphia.  Mr. Plosser’s remarks were credited by many in the press as the reason for that afternoon’s sell-off in the markets, which resulted in a -1.04% decline on the S&P 500.  Although not currently a voting member of the FOMC, as President of a regional Federal Reserve branch, his opinions and influence are important to monetary policy decisions.

While Mr. Plosser still believes that growth will be 2% in 2012 and 3% in 2013 and 2014, the financial press was principally focused on his comments that quantitative easing is not effective at helping the broader economy.  His belief is that too little focus is placed on the potential future costs of printing money and that the Fed actions carry with them ‘significant risks’ with ‘meager’ benefits.  Honestly, I was somewhat surprised by the frank comments from Mr. Plosser.  After all, it’s not all that often Federal Reserve officials are completely candid with their outlook (can you remember the last time the Fed called for a recession?).  Nonetheless, the straightforward opinion was a nice change from the normally overoptimistic Federal Reserve comments.

During the Q&A session, I was able to sneak a question in for the President.  Specifically, I asked if Mr. Plosser could comment on the channels in which Quantitative Easing (QE) is effective (through lowering rates, depreciating the dollar, and increasing asset prices).  Covertly though, my intention was to get his view on QEs ability to increase equity prices.  Similar to his comments regarding the cost and benefits of QE, his frank answer was that quantitative easing should not increase the value of asset prices.  Mr. Plosser’s explanation was that asset prices are simply a discounted value of future cash flows.  Although QE lowers the rates at which equities are discounted, he had a strong view that “quantitative easing does not create wealth.”  My guess is that Mr. Bernanke and Wall Street would disagree with Mr. Plosser here.  Time will tell who is ultimately correct.

Source: Brinker Capital and FactSet

To read Mr. Plosser’s speech, please click here.

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