By Yali N’Diaye

AVENTURA, Fla (MNI) – With U.S. inflation risks tilted to the
upside, the Federal Reserve must be prepared to “take the right actions
at the right time” and exit its accommodative monetary policy as
aggressively as needed to keep inflation expectations anchored,
Philadelphia Fed President Charles Plosser said Thursday.

The right exit time, he said, could well be in the “not-too-distant
future” should the economy continue “to make progress.”

Overall, however, determining the right timing will be based on
incoming economic data, Plosser said in prepared remarks to the New
Jersey Bankers Association’s 107th annual convention on ‘Opportunities
in the New Decade.’

In that regard, “Signs that inflation or inflation expectations are
beginning to rise, or that growth rates are accelerating significantly
would suggest that it is time to begin taking our foot off the
accelerator and start heading for the exit ramp,” he said.

For now, Plosser, a voter on Federal Open Market Committee this
year, expects moderate growth.

In a speech titled “A Perspective on the Economic Outlook,” he said
the economy should continue its progress despite a weak showing in the
first quarter. Plosser said he considers that a temporary “soft patch”
affected by weather conditions, uncertainties about Japan and even
geopolitical developments in the Middle East and North Africa region
among other factors.

“My forecast is for continued moderate growth of around 3 to 3.5%
this year and next,” the central banker said.

Against this backdrop, “I expect that businesses will continue to
add to their payrolls,” he continued.

That should translate into an 8.5% unemployment rate at the end of
this year and 7% to 7.5% by the end of 2012.

“Growth in manufacturing remains one reason for optimism,” he said,
adding that improvements in household balance sheet and labor market
should support consumer spending while businesses will continue to spend
on equipment and software.

Housing, however, will remain a “weak spot” he said.

In such an environment, Plosser expects businesses to “test their
pricing power, particularly as concerns about the recovery’s
sustainability abate.”

In fact, there are already “signs that firms are becoming better
able to pass along some of these increased costs to their customers,” he
said.

As a result, “I see the inflation risks as being clearly to the
upside,” Plosser stressed, although he expects “oil price increases will
level off and that the currently elevated inflation measures will
reverse.”

“In this environment, we must have a plan in place to begin
normalization of monetary policy,” he said.

“Depending on how economic conditions evolve, we must be prepared
to act as aggressively as necessary if we are to promote effectively our
long-run goals of price stability and maximum employment,” he added.

The timing, however, will depend on incoming economic data, he
said, while keeping a close eye on inflation and inflation expectations.

Plosser reaffirmed his support for a systematic, rule-based exit
strategy that would “be strengthened if the FOMC adopted an explicit
numerical objective for inflation, which would help ensure that
inflation expectations remain well anchored.”

“Since monetary policy operates with a lag, the Fed will need to
begin removing policy accommodation well before unemployment has
returned to acceptable levels,” Plosser warned. “It is imperative that
we have the fortitude to exit as aggressively as necessary to avoid
undesirable consequences down the road.”

So while current inflation is likely to be mostly temporary, he
said, “To ensure that continues to be the case, the Fed will need to
take the right actions at the right time to exit the extreme
accommodative policy that is now in place.”

The “Fed should do all it can to underscore its commitment to price
stability,” he said, stressing the need to keep the central bank’
credibility intact, adding that “ultimately it is monetary policy that
creates sustained inflation, not price shocks.”

So “monetary policymakers must monitor both inflation and inflation
expectations carefully and be prepared to take actions if they are to
ensure that longer-run inflation expectations remain stable.”

“Thus, I am watching inflation developments and inflation
expectations closely,” Plosser concluded, even as he expects oil prices
to stabilize and headline inflation “come back down.”

** Market News International **

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