–Must Be Willing To Act To Keep Infl Expectations Stable, Protect Cred

By Brai Odion-Esene

WASHINGTON (MNI) – Echoing the words of Federal Reserve Chairman
Ben Bernanke and his other colleagues on the Federal Open Market
Committee, Philadelphia Fed President Charles Plosser Thursday warned
that monetary policy cannot be expected to be a panacea for all that
ails the U.S. economy.

He also said that for the Fed to prove its commitment to its price
stability mandate, the central bank must be willing to act “at the right
time” to withdraw the massive amounts of monetary stimulus it currently
has in place.

In remarks prepared for the Society of Business Economists’ Annual
Conference in London, Plosser acknowledged the “somewhat disappointing”
rate of growth in the first quarter of this year, but added that this
weakness “will likely prove to be a temporary soft patch.” He said the
underlying fundamentals remain in place for the economy to resume
growing at a moderate pace in the second half of this year, and to
strengthen a bit more next year.

Some have used the slower than-expected growth numbers, together
with last week’s disappointing jobs report, as reasons for the Fed to
inject additional monetary stimulus into the economy.

Plosser, a voter on the FOMC this year, poured cold water on the
idea, calling instead for an end to the “drama” being played out in
Congress over the federal debt. He said the development of a plan by
lawmakers on future spending levels would “undoubtedly” boost confidence
and lower uncertainty.

“Monetary policy cannot and should not be viewed as a substitute
for sound fiscal policies,” and it is not the “silver bullet” that many
would like it to think it is, he said.

“It cannot solve all of our economic ills, and attempting to do so
can be quite dangerous for economic stability,” Plosser cautioned.

Plosser also said he believes the slower growth in the early part
of this year has similarly been influenced by a number of temporary
factors. “Oil and commodity price increases and supply chain disruptions
from the devastation in Japan may have some carryover into the second
quarter, but I believe any loss of momentum is likely to be transitory,”
he assured.

He predicted “moderate but above-trend growth” of around 3% to 3.5%
for the remainder of this year and 2012.

On the employment front, Plosser said that as the economy
strengthens this year, he expects businesses will continue to add to
their payrolls. As a result, he projected modest declines in the
unemployment rate, to about 8.5% by the end of 2011, and then to a range
of 7% to 7.5% by the end of 2012.

The Philly Fed chief also reaffirmed his credentials as an
inflation hawk, warning that he sees inflation risks in the U.S. as
being clearly to the upside.

“There are signs that firms are becoming better able to pass along
some of their increased costs to their customers,” Plosser said.

The Fed must ensure that inflation expectations stay anchored given
its accommodative monetary policy, he said. This is why Plosser said he
found it “somewhat troubling” that inflation in the medium to longer
term inflation expectations are fluctuating as much as they are.

“It suggests that the public and the markets may not have as much
confidence in the Fed’s ability, or willingness, to deliver on its price
stability mandate,” he said.

Plosser cautioned that once credibility is lost, it is very
difficult to regain, and once again urged the Fed to adopt an explicit
numerical inflation target.

He argued that while an inflation target is not a panacea for all
the challenges facing monetary policymakers, “it is an important element
in a credible program for monetary and economic stability.”

“We must be willing to do more than just talk about our
commitment,” Plosser said. “We must be willing act — that is, undertake
the necessary and difficult policies to ensure that medium- to
longer-run inflation expectations remain stable and our credibility
remains intact.”

“This includes taking the right actions at the right time to exit
the extreme accommodative policy that is now in place,” he added,
insisting that as the economy recovers, the Fed must normalize its
monetary policy framework.

He repeated that the first steps should be asset sales and
shrinking the volume of excess reserves.

“I believe we can be most successful in exiting from this period of
extraordinary accommodation and nontraditional policies if we
communicate a systematic plan that describes where we are headed and how
we will get there,” Plosser said.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]