Paul Volcker has some strong advice for Ben Bernanke and his colleagues at the Federal Reserve: don't get too proud.
Speaking at an economic summit on Wednesday, the former Federal Reserve Chairman advised caution about current accommodative central bank policy, which involves near-zero interest rates and large-scale asset purchases in an attempt to stimulate growth. Volcker called the notion that the Fed can nimbly shut off that accommodative policy in response to inflation upticks "hubris."
"There is no central bank that I know of that has ever exhibited the capacity for that kind of fine tuning," he told an audience at the Atlantic Economic Summit in Washington, D.C.
Currently, the Federal Reserve is on its third round of quantitative easing (known widely as "QE3"), involving monthly purchases of $85 billion in mortgage-backed securities and treasuries. In addition, the FOMC has decided to continue its accommodative low-interest-rate stance as long as unemployment is above 6.5 percent and inflation expectations are below 2.5 percent.
While he said that he does not foresee "runaway inflation" in the near future, Volcker advised "rejecting the siren song that a little inflation—just a little inflation—can be the path to prosperity."
The former central banker has plenty of experience with taming inflation. Many credit Volcker with helping to end the inflation spike of the late 1970s and early 1980s. During his tenure as Fed chairman, inflation fell from around 13 percent to just over 3 percent.
While Volcker has questioned QE3's effectiveness since its inception in September 2012, he added that the decision to end easing will be muddied by current political and economic circumstances.
"The depth of the recession, the nature of prolonged unemployment, and the continued financial strains and doubts about the fiscal outlook complicate decision-making," he said.
He's not the only one contemplating the end of QE3. The minutes from the FOMC's January meeting showed some committee members expressing worries about continued asset purchases.